The Basel Committee on Banking Supervision is staking out a conservative position on many bank-held cryptoassets. If adopted in the U.S., banks would be required to hold dollar-for-dollar capital against cryptocurrencies.
What is bank capital? At a high level, a bank’s capital is its equity: the difference between its assets and its liabilities. Banks are required to maintain specified ratios of their regulatory capital—defined instruments such as common stock—to their total “risk-weighted assets.” Risky assets receive a higher “weight” under bank capital rules, and the more assets with higher risk weights a bank has, the more regulatory capital it needs to hold to maintain its required capital ratios.
The Basel Committee, a cross-border panel comprising national-level regulators, recently issued for comment a proposal that would divide cryptoassets into two types for purposes of bank capital rules and recommend the “risk weights” that should be applied to each type of cryptoasset.
Under the Basel Committee’s proposal, Group 1 cryptoassets would include both “tokenized” digital versions of other assets and stablecoins. The Basel Committee recommends that these Group 1 cryptoassets receive the same risk weight as the underlying asset they “tokenize” or to which their value is pegged. The proposal sets forth qualifications that a cryptoasset would have to meet to be classified in Group 1.
Group 2 cryptoassets would comprise all other cryptoassets, including cryptocurrencies like bitcoin and ether. For Group 2, the proposal recommends a risk weight of 1,250%. Effectively, for a bank required to maintain an 8% capital ratio, a risk weight of 1,250% means that the bank has to have the same amount of regulatory capital, dollar for dollar, as the value of the Group 2 cryptoassets it holds. This capital “cushion” would be designed to absorb a potential loss of 100% of the value of a bank’s Group 2 cryptoassets.
The Basel Committee’s proposal is a “consultative document,” and has only been issued for comment, with a comment period ending on September 10, 2021. Even if the Basel Committee eventually publishes the proposal as-is, it would not bind national regulators. Any changes to the U.S. capital rules will require the U.S. federal banking agencies to conduct an ordinary course notice-and-comment rulemaking. U.S. regulators have not commented on the Basel Committee’s proposal, and the U.S. banking agencies have a history of both adopting and ignoring Basel recommendations.