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Bitcoin put in highest risk category in bank capital plan; JP Morgan warns of bear market

Banks will face the toughest capital requirements for holdings in bitcoin and other cryptocurrency assets under global regulators’ plans to ward off threats to financial stability from the volatile market.

The Basel Committee on Banking Supervision said that the banking industry faces increased risks from crypto assets because of the potential for money laundering, reputational challenges and wild swings in prices that could lead to defaults.

Bitcoin prices initially jumped on the news, before paring gains.Credit:AP

The panel proposed that a 1250 per cent risk weight be applied to a bank’s exposure to bitcoin and certain other cryptocurrencies. In practice, that means a bank may need to hold a dollar in capital for each dollar worth of bitcoin, based on an 8 per cent minimum capital requirement. Other assets with this highest-possible risk weighting include securitised products where banks have insufficient information about underlying exposures.

“The growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks,” the Basel Committee, which includes the Federal Reserve and European Central Bank, said in the report.

“The capital will be sufficient to absorb a full write-off of the crypto asset exposures without exposing depositors and other senior creditors of the banks to a loss.”

Bitcoin jumped about 5 per cent on the news before paring gains.

“It’s a piece of news that both advocates and critics of bitcoin will declare as a win. It demonstrates that bitcoin is now a recognised asset class with risk management parameters for the banks, but these same parameters could be a potential deterrent given the onerous capital requirements that may make it an unpalatable business,” said Luke Sully, CEO at treasury technology specialist Ledgermatic.

The proposal is open to public comment before it will take effect, and the committee said these initial policies are likely to change several times as the market evolves. No timeline was specified in the report but the process for agreeing and implementing Basel rules worldwide can typically take years.

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