Ties between traditional financial institutions and cryptocurrency have been a hot topic in the past week, with an international governing body and US lawmakers both weighing in on what to do about them.
The Basel Committee on Banking Supervision (BCBS) guidelines unveiled Friday for banks playing in the digital asset space. On the same day, the Financial Stability Oversight Council (FSOC) called for such regulation in its Annual Report.
The BCBS sets standards for two groups of crypto assets. Group 1 includes traditional tokenized assets and stablecoins. Group 2, on the other hand, includes riskier products that are unsupported and do not meet Group 1 standards.
Group 1 assets are subject to capital requirements based on the underlying exposures, as set out in the existing Basel framework. For Tier 2 assets, the finalized guidelines limit banks’ exposure to 1% of their Tier 1 capital.
Chen Xu, a lawyer at Debevoise & Plimpton in New York, said American banker Basel Committee regulations have little impact on US banks because they are prohibited from holding some of the assets regulated by the framework. Most crypto assets, he said, belong to group 2.
The finalized framework “is important if only for the reason that it establishes a common baseline from which global regulators can build,” Xu told American Banker.
“If and when the US and other jurisdictions manage to introduce or implement capital requirements for exposures to crypto assets, they will look to Basel for guidance,” he said.
The FSOC, meanwhile, said in its report that lawmakers need to step up their game by drafting laws that give federal regulators the power to regulate the cash market in crypto assets that aren’t securities. Measures must be taken”to deal with regulatory arbitrage, as crypto-asset entities offer similar services to traditional financial institutions but lack a consistent or comprehensive regulatory framework,“said the FSOC.
Interconnections between the crypto world and banks »broaden the effects of shocks that originate in the digital asset ecosystem,” the report states.
Reports come in like potentially over 1 million creditors worldwide upheaval of woes caused by the November collapse of cryptocurrency exchange FTX. Direct links with FTX impactedseveral banks, including Moonstone Bank in Washington State.
About 2.7 million FTX accounts were held by US customers, according to bankruptcy filings. Sense. Elizabeth Warren, D-MA, and Tina Smith, D-MN, letters written this month to the Federal Reserve and the Office of the Comptroller of the Currency, calling on regulators to scrutinize US banks whose assets are caught in the FTX fallout. Moonstone, the senators claimed, received an $11.5 million investment from FTX’s sister company, Alameda Research.
The senators also named Provident Bank, Metropolitan Commercial Bank, Signature Bank, Customers Bank and Silvergate Capital in their letter. Silvergate reportedly had crypto deposits representing “90% of the bank’s overall deposit base, amounting to $11.9 billion.”