Regulators' decision to classify Bitcoin as a high-risk asset

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Regulators' decision to classify Bitcoin as a high-risk asset

The decision by the International Banking Regulators to classify Bitcoin as the main asset further dragged cryptocurrencies into the international financial world.

It also made it extremely costly for banks to store digital tokens on their balance sheets, potentially delaying crypto's wider adoption.

The Basel Committee on Banking Supervision proposed that a 1,250% risk weight should be applied to the bank's exposure to Bitcoin and certain other cryptocurrencies. Bitcoin jumped on the announcement before sharing the gains.

What has been the only consistency, as was the volatility - it's been big surges, tons of enthusiasm, followed by big selloffs, said Ross Mayfield, investment strategy analyst at Robert W. Baird Co. of Bitcoin's moves. If you believe in it you are likely to deal with volatility but just because it seems like the quick way to get a quick buck, this volatility will be hard for you to deal with.

The decision sparked a bevy of reactions on Wall Street and other financial centres in the world. Here is a sampling:

It's a piece of news that both advocates and critics of Bitcoin will declare as a win. It demonstrates that Bitcoin may now be a respected asset class with risk management parameters for banks, but these same parameters could be a potent deterrent given the onerous capital requirements and possibly make it an unpalatable business, he said. There are a few underlying assumptions in this risk weighting, the most obvious being that the market could be lost and investors could lose their own share of the future. The capital requirements don't either protect banks clients from any particular trade, settlement or volatile FX demand.

To me, this whole thing is just a way for the entities to get involved in the conversation, along with the IMF. In terms of implementing these requirements it's going to go forward, and at least for now stop regulating traditional banks that are not regulated by those regulatory entities and that will allow for more and more traditional players, who are not regulated, to go ahead and pull further forward, said he. An regulator has very little upside and enormous downside - it is like being a policeman. You want to protect people. So the furthest you can go in terms of lodging measures that stop activity, the better. And so, I think that they are now inserting themselves for the first time. This does not mean the end of Ethereum, the end of Bitcoin.

I don't think these things are bad or good as they are - it depends on what the objective is, he said. It's not decentralized, it is highly concentrated. Crypto was born in an age in which we had very extreme disparities of wealth and income - how can the society not reflect this? The bulk of Bitcoin that is owned by wallets has more than 100 dollars, that's more than $300,000. How many Americans have $300000 in depository funding in crypto when opposed to retirement money?

And 'Obviously, tougher capital requirements may have an impact on the banks - that can have an impact on them and their earnings in cash. The committee says cryptocurrencies are very volatile, you have to have more capital at hand to protect against declines, he said. If it takes more money for banks to hold these cryptocurrencies on their books, they're going to be less likely to hold the same kind of size as they would otherwise will.

Wells Fargo analyst Matt Miller said in a Bloomberg TV interview with Mike Mayo :

'It is just getting hammered, but you know what? It's treated like any other high-risk asset like subprime loans, or CDOs, or derivatives or structured products. And it's a new product and it is a new product. It is untested through economic cycles. It's untested by liquidity.

More stories like this are available on bloomberg.com.

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