Banks must set aside capital to cover losses on Bitcoin

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LONDON, June 10 - Banks must set aside enough capital to cover losses on any Bitcoin holdings in full, global banking regulators proposed on Thursday in a large step that could prevent the widespread use of the cryptocurrency by major lenders.

The Basel Committee on Banking Supervision, formed of regulators from the world's leading financial centres, proposed a twin approach to the capital requirements for cryptoassets held by banks in its first bespoke rule for the nascent sector.

El Salvador has become the first nation in the world to accept Bitcoin as a legal tender even though central banks worldwide repeatedly warned that investors in the cryptocurrency must be ready to lose all their money.

Major economies like China and the U.S. have signalled a tougher approach in recent weeks when developing plans to develop their own Digital Currency currency on their central bank websites.

The Swiss-based Basel committee stated in a public consultation paper that while bank exposures to cryptoassets are limited, their continued growth could increase costs for global financial stability if capital requirements are not introduced.

Bitcoin and other cryptocurrencies are currently worth around $1.6 trillion globally, which is still the actual value of that dollar compared to the initial holdings of banks and derivatives and other major assets.

Basel's rules require banks to assign risk weightings to different types of assets on their books, with these further totted to determine overall capital requirements.

Basel proposes two broad groups for cryptoassets.

The first includes certain tokenized traditional assets and stablecoins which would come under existing rules and are treated the same way as bonds, loans, deposits, equity or commodities.

This means weighting may range from 0 for a sovereign policy to 1,250% or fully defined value of the assets covered by capital.

The value of stablecoins and other group 1 crypto-assets are connected to a traditional asset, such as the $dollar in the case of Facebook's Diem Stablecoin.

Nevertheless, given that cryptoassets are based on the newly emerging and rapidly evolving technology like Blockchain, this poses a potentially increased risk of operational risks that will demand an add-on capital charge for all types, Basel said.

The second group includes cryptocurrencies like bitcoin which would be subject to a unique prudential treatment with a risk weighting of 1,250% because of their new conservative risks.

Bitcoin and other cryptocurrency are not connected to any underlying assets.

Under the Basel regulations, a 1.250% risk weight translates into banks having capital equal in value to their exposures to bitcoin or other group 2 cryptoassets.

It added that the capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss, it added.

Few other assets which have such conservative treatment under Basel’’s existing rules, and include investments in funds or securitisations where banks do not have enough information about their underlying exposures.

The value of bitcoin has swung wildly, reaching a record high of around $36,834 in mid-April before rallying on Thursday to close on as much as $34,895.

The appetite for cryptocurrency varies, with HSBC saying that it has no plans for a bitcoin trading desk because the digital coins are too volatile. In March, Goldman Sachs relaunched its Crypto Trading Desk.

Basel said that a further public consultation on the regulations to have and regulate cryptoassets, considering the rapid evolving nature of the system, is likely before the final rules are published.

Digital currencies are not included in its proposals at central banks.

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