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BIS Limits Banks to Hold 1% of Reserves in Bitcoin –> “Banks Won’t HOLDL”

Finbold | Ana Nicenko  | Jul 3, 2022

BIS - BIS Limits Banks to Hold 1% of Reserves in Bitcoin --> "Banks Won't HOLDL"

Despite its skeptical approach to digital currencies, exacerbated by the recent cryptocurrency market crash, it looks like the Bank for International Settlements (BIS) intends to extend its hand to the new asset class by allowing banks to hold up to 1% of reserves in cryptocurrencies such as Bitcoin (BTC).

Indeed, BIS’s Basel Committee on Banking Supervision (BCBS) has made the proposal for limiting the banks’ total exposures to “Group 2 cryptossets to 1% of Tier 1 capital” in its consultative document titled “Second consultation on the prudential treatment of cryptoassets,” published on June 30.

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Group 1 vs. Group 2 assets

Specifically, Group 2 refers to the assets that do not meet classification conditions and includes specific tokenized traditional assets and stablecoins, as well as unbacked crypto assets. As opposed to Group 2, Group 1 includes tokenized traditional assets and stablecoins that meet classification conditions.

BIS Group 1 vs 2 assets - BIS Limits Banks to Hold 1% of Reserves in Bitcoin --> "Banks Won't HOLDL"

Image: BIS

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Coindesk OpEd| Frances Coppola | Aug 3, 2022

Banks and crypto - BIS Limits Banks to Hold 1% of Reserves in Bitcoin --> "Banks Won't HOLDL"Banks won't HODL

New proposals from the Bank of International Settlements are unlikely to lead banks to hold bitcoin. But they could open the door to CBDCs, says our columnist.

“Bank for International Settlements to allow banks to keep 1% of reserves in bitcoin,” cries the headline on an article about the BIS’ newly proposed regulations for banks holding crypto assets. The article was retweeted by Changpeng "CZ" Zhao, CEO of crypto exchange Binance, with the comment, “Banks now use bitcoin for reserves. Probably nothing.” Crypto Twitter went wild. Zhao's comment was retweeted thousands of times and “liked” by more than 10,000 people.

See:  OSFI Consultation on Prudential Treatment of Cryptoasset Exposures

If the BIS really intends to “extend its hand” to bitcoin by allowing banks to hold it as reserves, as the article claims, that would indeed be great news for bitcoin as an asset class, though perhaps not for those hoping it would eliminate banks. But sadly, the BIS, which is an organization of the world's major central banks, has no intention of doing any such thing. The article unfortunately misunderstands the BIS’ proposals.

Far from extending a helping hand to bitcoin, the BIS is cutting the rope.

Bitcoin limits

The 1% exposure limit applies only to Group 2 assets. It means that because Group 2 assets are extremely risky, banks won't be allowed to have much in the way of exposure to them. In the example above, J.P. Morgan has Tier 1 capital of 13.7% of total risk-weighted assets. So for J.P. Morgan, total Group 2 crypto asset holdings (including bitcoin) can’t be more than 0.137% of its total risk-weighted assets – and considerably less of its total assets unweighted for risk. Admittedly, for a bank the size of J.P. Morgan, that is still a lot of bitcoin. But it’s worth remembering that the previous version of the BIS proposals, issued in June 2021, didn’t impose a total exposure limit. So, far from encouraging banks to hold bitcoin, the revised proposals actually make it more difficult.

See:  BIS Report: Can CBDCs be designed to help financial inclusion?

In fact the BIS’ proposals make it extremely expensive for banks to hold or trade bitcoin on their own account at all. The regulations for Group 2a and 2b assets in the chart above force banks to write off bitcoin holdings fully against capital. The BIS’ 2021 proposals explain that the 1,250% risk weighting for Group 2b assets is effectively a 100% capital charge: “A $100 exposure would give rise to risk weighted assets of $1,250, which when multiplied by the minimum capital requirement of 8% results in a minimum capital requirement of $100 (i.e. the same value of the original exposure, as 12.5 is reciprocal of 0.08).”

In layman’s terms, this means that banks cannot use customer deposits or issue senior bonds to finance the acquisition of bitcoin or any other cryptocurrency. They can finance them only from capital. That ensures that in the event of the value of their crypto holdings crashing to zero, none of their customers or creditors will be affected.

But equity finance is considerably more expensive than debt finance – and shareholders might look askance at a bank taking such risks with their funds.

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