Global regulators have said cryptocurrencies such as bitcoin should come with the toughest bank capital rules to avoid putting the wider financial system at risk should their value collapse suddenly.
The Basel Committee on Banking Supervision, which consists of regulators from the world’s leading financial centres, is proposing a “new conservative prudential treatment” for crypto-assets that would force banks to put aside enough capital to cover 100% of potential losses.
That would be the highest capital requirement of any asset, illustrating that cryptocurrencies and related investments are seen as far more risky and volatile than conventional stocks or bonds.
“Crypto-assets have given rise to a range of concerns including consumer protection, money laundering and terrorist financing, and their carbon footprint,” the Basel Committee said. While most regulated banks currently have limited exposure to cryptocurrencies, the committee warned that the “growth of crypto-assets and related services has the potential to raise financial stability concerns and increase risks faced by banks”.
The world’s most powerful banking standards setter warned on Thursday that certain crypto-assets had proved to be highly volatile, meaning they 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”.
However, it said looser rules could apply to stablecoins – a new form of digital asset usually pegged to the value of a traditional currency – that may require only a level of capital rules applied to traditional assets such as bonds, loans, deposits, equities or commodities.
The committee’s proposals, which will now go out for consultation, are meant to help protect the global financial system in case cryptocurrency prices plummet.
The price of bitcoin rose more than 5% after the report was published, to $37,361. However, the cryptocurrency has tumbled by 40% since hitting all-time highs of more than $64,000 (£45,000) in mid-April.
If adopted, the committee’s capital requirements could put some banks off dealing in cryptocurrencies, which have surged in value over the past year, but have proven incredibly volatile, owing to the fact that they are not backed by any other underlying assets such as dollars or gold to help ground the price.
Lenders are increasingly split over whether to adopt or shun cryptocurrencies, which are growing in popularity among customers. Goldman Sachs and Standard Chartered have launched their own cryptocurrency trading desks to take advantage of their rapid growth, while HSBC has vowed to steer clear of the asset.
The UK lender NatWest has said it will refuse to serve business customers who accept payment in cryptocurrencies alongside those made by debit, credit cards and cash, even though it could mean turning away notable companies including the ethical cosmetics firm Lush and office-sharing firm WeWork.
While most authorities are starting to crack down on the use of crypto-assets, some are taking a more open-minded approach. El Salvador announced this week that it would become the first country to adopt bitcoin as legal tender, despite repeated warnings from central banks that investors should be ready to lose all their cash.
The regulator in China caused bitcoin prices to plunge last month when it banned banks and payment firms from offering clients any services involving cryptocurrencies and warned of the risks linked to trading in crypto-assets.
Meanwhile, the governor of the Bank of England, Andrew Bailey, has told investors they should be prepared to lose all their money if they dabble in cryptocurrencies, since they are not covered by consumer protection schemes.
Regulators at the European Central Bank have likened bitcoin’s meteoric rise to other financial bubbles such as “tulip mania” and the South Sea Bubble, which whipped investors into a frenzy before the bubbles burst in the 17th and 18th centuries.
