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As regulators ponder guardrails, banks ask for space to grow crypto

The largest banks in the nation are now asking for more space to grow crypto.

Photo By "CNBC"

The largest banks in the nation are now asking the international body of regulators to offer them space. This space will help them to flourish their crypto exposure. Hence it is sparking a debate over where the guardrails must be placed on the emerging asset class.

On Tuesday, a group of advocacy representing the eight latest US-based financial institutions wrote to the Bank of International Settlements. They presented their proposal for a global framework for the bank’s exposure to crypto-assets.

“We find the proposals in the consultation to be so overly conservative and simplistic that they, in effect, would preclude bank involvement in crypto-asset markets,” the Financial Services Forum wrote.

The BIS’s Basel Committee published a proposed framework in June. It would delineate the assets like stablecoins from more speculative assets like bitcoin. The committee proposes different regulatory approaches based on the type of crypto assets the banks have exposure to.

The FSF has urged the BIS to lighten the stringent approach of the framework to the riskier crypto assets. The banks say that BIG should encourage the banks to deepen their involvement in the crypto space. It would bring the emerging asset class into a clearer line of sight. It will help the banking regulators.

The US bank regulators have deferred to BIS concerning any of the approaches. However, the Security and Exchange Commission Chair Gary Gensler said that the riskier crypto assets must be treated that way.

Gensler said, “To hold appropriate capital if it’s on a bank’s balance sheet would seem to fit into the remit that we’ve had in the past: that there be appropriate shock absorbers against a potential loss.”

The SEC is not a poor banking regulator. Any of the Basel rules would get implemented in the US. Under the BIS proposal, crypto, which is not the tokenized version, lacks a stabilization mechanism. Its value would get the categorization of a Group 2 asset that comes with the higher risk.

The Basel Committee will slap these Group 2 assessments that come with 1250% of risk weight. The Higher risk weights will require a bank to hold more capital against the holding to insulate the depositor of the firm for any losses that may come. The capital will be insufficient to absorb the full write-off for the crypto asset exposure without exposing the depositors and creditors.

The banking industry further wrote that the crypto world is too diverse to apply to one risk weight across the category. The regulatory framework must account for any of the hedges that a bank can make.

BIS had stopped taking public comments on the proposal earlier this month but committed to an iterative process. It would involve rounds of consultations as the framework comes together.


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