The Basel Committee stated on Thursday that the banking industry faces increasing risks from crypto assets due to the potential for money laundering, reputational challenges, and extreme price volatility that could lead to defaults. The banking supervision committee proposed applying a 1250% risk weight for banks' exposure to Bitcoin and other cryptocurrencies. Practically, this means that banks may need to hold one dollar in capital for every dollar's worth of cryptocurrency, based on minimum capital requirements set at 8%. Other assets that carry the highest possible risk weighting include securitized products for which banks lack sufficient information about relevant exposures.
The Basel Committee, which includes the Federal Reserve and the European Central Bank, reported that “the growth of crypto assets and related services has the potential to raise concerns about financial stability and increase the risks faced by banks.” It added, “Capital would be sufficient to absorb the full write-off of exposure to crypto assets without putting depositors and other major creditors of banks at risk of loss.”
The proposal is open for public comment before it is implemented. The committee indicated that these initial policies are likely to change multiple times as the market evolves. Capital requirements will be lower concerning some other assets, such as tokens with values linked to real-world assets.
The popularity of cryptocurrency surged this year, as both traders and retail investors sought profits from Bitcoin, as well as from the more obscure areas of the market. Several factors fueled the cryptocurrency bull market, including excitement over its institutional adoption, the idea that it serves as a store of value akin to “digital gold,” and endorsements from notable investors like Paul Tudor Jones and Stanley Druckenmiller.
Bitcoin surged from about $10,000 last September to $63,000 by mid-April. However, prices collapsed last month, dropping back to around $37,000 amid stricter regulatory scrutiny in China and Elon Musk's criticism of the cryptocurrency's high energy costs.
