- The Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) has recommended that exposure to cryptocurrencies should be no more than 1% of Tier 1 capital.
- In June 2021, the entity indicated that banks that were exposed to cryptocurrencies had to have capital equivalent to that amount, giving zero value to digital assets.
- The entity has the idea of dividing cryptocurrencies into two groups. Within group 1 would be the traditional tokenized assets that can pass redemption risk tests and bas risk and in group 2, there will be those that cannot, such as Bitcoin and Ethereum.
When the market is in the red, fear and losses appear. Although those critics who claimed to have the crystal ball and that cryptocurrencies were a “bubble” also come to light, taking advantage of the critical moment that Bitcoin is currently experiencing, not finding a support to start its takeoff.
One of these detractors is the Basel Committee, who once again expressed themselves about the risks of digital assets with a message for traditional banks.
Basel Committee on Banking Supervision issues recommendation
The recommendation of the Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) is that exposure to cryptocurrencies should be no more than 1% of Tier 1 capital.. Within this category are the “basic reserve assets of a bank”, describes CryptoSlate.
Cryptocurrencies have been in the focus of the Basel Committee for a long time and this is the second attempt in a year to determine certain guidelines after what was exposed in June 2021. Those recommendations did not come to fruition.
The Swiss entity, at that time, commented that the bank that was exposed to cryptocurrencies had to have capital equivalent to that amount, giving zero value to digital assets. If Bancomer had a million dollars in Bitcoin, it should have the same backing as a reserve in case of a debacle.
That document was harshly criticized by two renowned institutions such as JP Morgan and Deutsche Bank with the term “too conservative”. On this occasion, the Swiss also recognize exchange-traded funds (ETFs) and other derivatives as a hedge for cryptocurrency exposure.
The 2008 financial crisis changed the world economic scheme: Lenders must now guarantee capital reserves to back assets in case of default. In this way, banks no longer have as much exposure to a single counterparty. This should also apply to cryptocurrencies according to the Basel Committee.
However, we must also remember that that crisis gave rise to the appearance of Bitcoin and later to the rest of the digital assets.
What are group 1 and group 2 cryptocurrencies?
The Swiss entity In addition to proposing what has already been stated, has the idea of dividing cryptocurrencies into two groups. Within group 1 would be the traditional tokenized assets, such as shares (which are within the blockchain) and certain stable coins.
To find themselves in this group, stablecoins will have to pass “refund risk and basis risk tests.” The first ones, their name makes it clear, are those that guarantee that they can be reimbursed at any time. The basis risk test is what indicates whether the stablecoin can be sold at the reference value.
All the others that are not part of these are in group 2, including Bitcoin and Ethereum, the two largest by market capitalization. These are the ones to fear, according to the Basel Committee.
While 1% may seem conservative at this point, keep in mind that both JP Morgan and Deutsche Bank handle billions of dollars. It is estimated that the first ones have $264 billion dollars in tier 1 capital, so 1% is $2.64 billion would be available for cryptocurrencies, which is not a minor number.
If they would buy that money today, they would be the company with the most BTC in the world, ahead of MicroStrategy and Tesla, for example.
After not having obtained a favorable response in your first exhibition, what will happen this time with the new guidelines?
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