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Bank Watchdog: Crypto Assets Fail as Money – and Digital Gold

Last Updated March 4, 2021 3:19 PM
Tim Lloyd
Last Updated March 4, 2021 3:19 PM

The Basel Committee on Banking Supervision (BCBS), a supranational banking watchdog, has warned that the growth of crypto assets like bitcoin pose a threat to banks and global financial stability, despite “very limited direct exposures.”

BCBS Lays into Bitcoin, Says it’s Not a True Store of Value

In a March 13 newsletter statement , the BCBS said that crypto assets fail both as money and “digital gold.”

“While crypto-assets are at times referred to as ‘crypto-currencies’, the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto-assets are not legal tender, and are not backed by any government or public authority.”

The Committee, which sets global regulatory standards for banks, is primarily concerned with the high degree of volatility associated with the “immature” cryptocurrency class. But the watchdog also raised the alarm over crypto’s liquidity risk, credit risk, market risk, operational risk, money laundering and terrorist financing risk, and legal and reputation risks.

If a bank plans to acquire exposure to crypto-assets, the Committee recommends that the institution, “at a minimum,” implements crypto-specific due diligence, governance and risk management, disclosure, and supervisory dialogue.

Increased Capital Requirements?

There is speculation  that the BCBS’ latest crypto guidance could be a lead-up to more stringent capital requirements for banks planning to integrate digital assets into their portfolios. Furthermore, any new crypto rules will require more precise definitions and distinctions between tokenized, enterprise digital assets, which are relatively low risk, and more volatile cryptocurrencies.

For example, Todd McDonald, the co-founder of R3, a blockchain consortium of over 200 financial institutions, wrote a blog post  about token classification. Meanwhile, the Global Digital Finance Group, a crypto-asset trade body, authored a paper  that proposed dividing tokens into three categories: consumer, payment, and financial asset.

An Evolving – and Maturing – Industry

Fidelity, Bitcoin
Fidelity has already rolled out cryptocurrency custody for a small number of clients. | Source: Shutterstock

This guidance comes at a time when the crypto industry is increasingly evolving beyond the 2017 initial coin offering (ICO) mania towards more institutionally-vetted securities token offerings (STOs) and so-called stablecoins. Even establishment financial services firms like JPMorgan Chase have recently launched proprietary digital currencies that represent fiat assets.

Additionally, several other large Wall Street firms like Fidelity, Goldman Sachs, Bank of New York Mellon Corp, and Northern Trust Corp have made headlines for their initiatives to add custody for bitcoin and other digital assets into their product offerings.

The BCBS said it will “in due course clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets.”

It is currently coordinating this work with other supervisory bodies and the Financial Stability Board.