A wealth management figure and frequent commentator on financial affairs says that a global banking regulator’s comments on digital assets such as bitcoin are not an endorsement of this area, and in fact point to a tough environment for an area that has grown like wildfire in recent years.
(An earlier version of this article was published in Family Wealth Report, sister news service. The issues are, by definition, global, so we hope that readers find these comments relevant.)
Last week, the organisation – which is based at the Bank for International Settlements (BIS) – kicked off a consultation on proposals on how much risk capital lenders should set aside if they hold cryptos.
To some extent, the very fact that the group is at this point a sort of official endorsement for this fast-growing, if still controversial, area. The statement added to stories of how a raft of large financial players such as Morgan Stanley, Julius Baer, BNY Mellon and Guggenheim Partners have pushed into the digital assets space, making it more "mainstream."
When the Basel group's comments hit the wires, bitcoin prices actually rose, prompting some to suppose that the statement was a net positive for this area. The Bank for International Settlements is sometimes dubbed the "central banker's central bank," so its views carry weight.
However, R Christopher Whalen, a commentator on financial affairs and chairman of Whalen Global Advisors in New York, is unconvinced that the Basel group’s actions are anything other than a large health warning thrown at the cryptos' space. (Whalen has in the past spoken at events hosted by FWR.)
In his blog, The Institutional Risk Analyst, Whalen wrote: “The global bank regulatory community delivered a resounding rejection of the world of bitcoin and other 'untethered’ crypto tokens last week. Tokens are 'tethered’ when they are tied to the value of a real currency. By applying the highest possible capital weighting to bitcoin, the Bank for International Settlements (BIS) essentially put cryptoassets that are not fixed in value against a traditional currency into the financial bait bucket under Basle III/IV.”
“In the world of global bank capital requirements, 8 per cent capital vs assets is the standard that is set equal to 100 per cent risk weight. Capital risk weightings go from “zero” for most government debt exposures, to 20 per cent risk weight for parastatal entities such as Fannie Mae and Freddie Mac, to 50 per cent for secured loans on real estate, to 100 per cent for typical unsecured corporate exposures. By assigning a 1,250 per cent risk weight to cryptoassets, the BIS is essentially saying 'no thanks’ to bitcoin,” Whalen continued.
Whalen argues that the Basel group’s position will put “near-banks” such as New York-listed Square and SoFi Technology into a quandary. They have considered acquiring banking charters but must decide whether to remain in the world of non-banks, he said.
“To actually adopt a banking charter, as SQ is about to do, means leaving the world of cryptoassets behind,” he said.
“The rules applicable to the world of regulated banks do impact the world of non-banks, however. The tendency of corporate chieftains such as Elon Musk at Tesla to 'invest’ liquid funds into bitcoin will likewise be tempered by the fact that banks effectively cannot take positions in tokens. Indeed, the concerted lobbying effort to see bitcoin considered an 'asset’ under GAAP may have been dealt a fatal blow.
“The BIS decision exposes one of the central contradictions of bitcoin and other cryptoassets, namely the tension between being a means of exchange for goods and services and a speculative commodity. The volatility of bitcoin and other speculative tokens renders these virtual collectables too abstract for insured depository institutions,” Whalen said. He concluded by saying that when major central banks such as the US Federal Reserve develop their own electronic currencies, these official “tokens” will have zero risk weightings, pushing other cryptos into legally questionable margins.
In its statement on the consultation, the Basel Committee on Banking Supervision said: “While banks' exposures to cryptoassets are currently limited, the continued growth and innovation in cryptoassets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.”
The Committee, composed of regulators in major financial centres, proposed a twin approach to capital requirements for cryptoassets held by banks. Under the Basel system, banks must set aside capital based on the type of risks they run: the bigger the risk, the larger the capital required. A concern is that digital assets are so volatile that banks could be hit.