Don’t shut banks out of the crypto space, trade groups argue

A collection of global trade groups is pushing back on proposals that would impose hefty capital charges on banks that hold crypto-assets.

Earlier this year, the Basel Committee on Banking Supervision proposed a framework for regulating banks’ crypto exposures that envisioned a two-tier approach: digital versions of traditional assets would adhere to conventional capital requirements, while other forms of cryptocurrency such as Bitcoin would face hefty risk weights.

In response to that consultation, a joint submission from a group of industry associations — including the International Swaps and Derivatives Association (ISDA), the Global Financial Markets Association, the Financial Services Forum, the Futures Industry Association, the Institute of International Finance and the Chamber of Digital Commerce — warned that the prudential framework proposed by the Basel Committee “would create material impediments to regulated bank participation in cryptoasset markets.”

In particular, they said the proposed regime would make involvement in the crypto-asset market “cost-prohibitive from a capital perspective,” and that other aspects of the proposals also were unworkable.

“This approach is especially concerning given the rapid growth of cryptoasset-related market activity with participants that fall outside the perimeter of prudential and market regulations,” the group of industry associations said.

Currently, banks have limited exposure to crypto-assets, which the trade groups said “is neither desirable nor sustainable in the view of the industry.”

Among other things, the trade groups argued that there’s significant consumer demand for crypto, and that banks shouldn’t be excluded from the market — the move could stifle competition.

The groups also argued that regulated financial institutions should be able to enjoy the potential benefits of distributed ledger technology, such as lower transaction costs that could generate broader economic benefits.

Additionally, they said, “The public and the regulatory community would benefit from bank involvement in the cryptoasset space because of this long history of identifying, monitoring and managing risks from both a prudential and conduct perspective on an ongoing basis.”

The submission calls for the Basel Committee on Banking Supervision to consider sweeping revisions to their proposals.

“The associations believe that the changes we propose are necessary to ensure that the benefits of this new technology can be fully realized by businesses and households across all levels of the global economy,” the trade groups argued.

Specifically, they recommend that the regulators make greater use of the existing international capital rules (Basel III) to ensure a level playing field, prevent regulatory arbitrage, and limit the threat of risk accumulating outside the regulated industry.

“These changes would not dilute the proposal’s conservatism as it relates to the prudential treatment of lesser-known, more volatile cryptoassets but rather would facilitate a safer and more sound avenue by which the benefits of cryptoassets can be accessed by society,” the trade groups said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.