Basel Committee Suggests Capping Banks’ Bitcoin Holdings
- Under the revised rules, holdings of unbacked cryptocurrencies like Bitcoin and algorithmic stablecoins would be restricted to 1% of a lender’s capital.
- The Committee is seeking comments on the plans by the end of September and says it will monitor the fast-moving and volatile market in the meantime.
- For significant financial institutions like JPMorgan Chase, 1% of Tier 1 capital might equal billions of dollars.
The proposal from the Basel Committee on Banking Supervision seeks to reduce banks’ reliance on volatile assets and stem potential losses during periods of market stress. The limit would only apply to a lender’s so-called Tier 1 capital, the highest quality reserves that can be counted towards meeting regulatory minimums.
The new plans would see banks’ holdings of unbacked crypto-assets limited to 1% of their total capital. This is seen as a way to safeguard financial stability, as these assets are often highly volatile. The Basel Committee on Banking Supervision is responsible for setting this limit, and they have published a consultation document outlining the proposal.
This is the second time they have attempted to do so, after the first proposal was met with criticism from the industry for being too restrictive. It is hoped that these new plans will strike a better balance between protecting investors and allowing banks to participate in this growing market.
Lenders are required to have capital reserves that can be used as a backup in case assets such as loans turn sour. This requirement was toughened after the 2008 financial crisis in order to prevent a similar event from happening again. Banks are also not allowed to have significant exposure to any one entity, as this could lead to the bank’s collapse if that entity were to fail.
In its consultation, the Committee said that the large exposure rules of the Basel Framework should also apply to crypto-assets. The Committee noted that these rules are designed to capture exposures to individual counterparties or groups of connected counterparties, rather than exposure to an asset type. As such, applying these rules to crypto would mean that there would be no large exposure limits on Bitcoin or other cryptocurrencies where there is no counterparty.