The Basel Committee acknowledged that the crypto market “makes sense” now, but also fears that these new assets could affect financial stability. Why?
One of their biggest concerns is the possibility of being anonymous when using Bitcoin, which carries the obvious risk of facilitating money laundering.
For a risk averse Australian bank primarily focused on selling mortgages rather than rapid financial market trends, it is not worth risking a fine this amount to facilitate crypto trading.
Further risks for banks are consumer protection (cryptocurrencies are popular with fraudsters and fraudsters) and the massive carbon footprint of Bitcoin. As a result, the Basel Committee suggested that banks use extremely conservative “risk weights” – financial models used to determine the riskiness of assets – when exposed to crypto assets. To protect bank depositors, she suggested that banks hold one dollar of capital for every dollar in Bitcoin.
Lance Blockley, managing director of payment advisory services The Initiatives Group, says the risk weights proposed by Basel suggest regulators want to protect banks from the possibility of many cryptocurrency assets becoming near worthless. If the proposed weights were put into effect, it would be extremely unlikely that banks would hold crypto assets as collateral.
This tough stance is just the latest sign of regulators increasing pressure on cryptocurrencies – another is that the The Australian Tax Office will go through tax returns for undeclared crypto capital gains this year.
This caution also applies to many banks that do not want to deal with cryptocurrency exchanges as customers. The conservatism of the banks is so great that an investigation chaired by Liberal Senator Andrew Bragg claims allegations from “De-Banking”, where fintech companies are dumped as customers by banks, often for risk or regulatory reasons.
But is bank caution really such a problem?
In their defense, bankers say the risks associated with cryptocurrencies are simply too great and the rules too imprecise to be more involved in the sector. They are also not entirely absent from the debate about digital money. It’s worth noting that CBA, National Australia Bank, and Perpetual are also working with the Reserve Bank on another experimental form of money as part of a wholesale digital banknote project.
However, the banks’ high risk aversion can also result in costs. Is a risk by Bragg. explored is that Australian startups in this space will go overseas if the country’s largest financial institutions and regulators don’t have a clear framework for dealing with crypto assets.
Another risk is that the local sector will miss out on important innovations. The executive director of the Australian branch of the Kraken crypto exchange, Jonathon Miller, says that there has been a lack of large bank investments in the crypto sector through their venture capital arms – with one exception the lucrative investment by Westpac in the US company Coinbase. “I think banks have put themselves at a distance from innovation,” says Miller.
Miller says that being skeptical about cryptocurrencies is fine as some are actually experimental and we don’t know how useful they will end up being. But he says it’s too easy to characterize the entire field of crypto assets as speculative – and some asset managers agree that certain cryptos are becoming a more established asset class.
For now, however, bankers are likely to continue to watch the wild ride of cryptocurrencies from the sidelines.
Ross Gittins is on leave.
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