banking regulator formally recognises bitcoin as an asset class

The Basel Committee on Banking Supervision has formally recognised Bitcoin as an asset class. Today the regulator of international banking standards proposed a number of rules and standards for banks to hold cryptocurrency.Following the announcement on Thursday, the price of Bitcoin shot up by $2,000. 

The paper by the Basel Committee defined Bitcoin as an asset class, and set out a number of capital requirements for crypto asset risk exposure. Crypto Assets have been divided into two buckets; tokenized traditional assets such as stocks or bonds or stablecoin, are considered ‘low-risk’, while cryptocurrency falls into the second bucket. 

“The Committee is of the view that the growth of cryptoassets and related services has the potential to raise financial stability concerns and increase risks faced by banks. Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks. To that end, the Committee has taken steps to address these risks.”

In order to be classified as a lower risk asset, tokenized assets such as Stablecoins, for example, need to meet a number of requirements such as being regulated and need to be fully redeemable. Cryptocurrencies are considered higher-risk, and the regulator proposes a 1250% risk weighting for cryptocurrency exposures, and stated that banks are discouraged from exposing themselves to the risks.

While crypto assets have been adopted by only a small number of banks, the framework provided by the Basel Committee brings crypto assets into the spotlight, and marks a milestone for adoption and means that a criteria for traditional assets versys cryptocurrency is now in the process of being established.

The public consultation brings up a discussion about the urgent need to regulate and differentiate between crypto assets and cryptocurrencies. The Ripple Labs V. SEC legal trial is one example of the current tension between regulators and blockchain/crypto companies, and the need for a clearer regulatory framework.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.