In a meeting on October 4-5, the Basel Committee on Banking Supervision (BCBS) looked at the various causes that may have contributed to the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank. It concluded that so-called ‘crypto assets’ concentrated in a small number of banks was one of the three major things that played a role.
At its 4-5 October meeting, the #BaselCommittee agreed to consult on cryptoasset and climate disclosures, approved the annual G-SIB assessment and published its report into the banking turmoil of early 2023 #BaselIII #FinancialRegulation https://t.co/iLVbtP2VzS pic.twitter.com/aSRw7YYHP7
— Bank for International Settlements (@BIS_org) October 5, 2023
Along with increasing digitalization and nonbank intermediation, the Committee found that digital currencies had played an especially relevant role in the collapse of Signature Bank, noting:
“SBNY’s significant client concentration of digital asset companies put it in a precarious position when the “crypto winter” hit in 2022.”
While the New York State Department of Financial Services (NYDFS) said that digital currencies were not behind its decision to close the bank, the Basel Committee’s report finds they were a relevant factor in its destabilization.
As a result of its findings, the Committee is considering making it a requirement for banks to disclose the digital currencies they are holding. This would be in addition to the January amendment to limit digital currencies in bank reserves to 2%.
It’s yet another requirement that will make banks reluctant to buy risky digital currencies and tokens, spelling more bad news for speculators hoping for a fresh capital injection from institutions.
The Basel Committee was right, despite complaints from Coinbase and others
While the latest suggestion is merely a proposal to require banks to disclose what digital currencies they hold, the BCBS has sensed the danger digital currencies pose to the banking system and has been moving to mitigate the risks for some time.
In September 2022, when the BCBS released its second public consultation document detailing its proposed guidelines, the digital currency industry objected loudly, with the BTC-supporting Bitcoin Association of Switzerland calling them “so restrictive and so far away from a sensible approach that it is hard for us to comprehend…” Coinbase (NASDAQ: COIN) called the proposals “distinctly punitive,” acknowledging that they would make it unattractive for banks to get involved in many parts of the industry.
Yet, despite the protests and whining, less than six months later, the banking crisis began, and Signature Bank collapsed on March 12, 2023. It’s almost as if professional bankers understand risks better than ‘crypto-anarchists’ promoting glorified Ponzi schemes.
What did the industry find so objectionable? The proposals outlined two groups to categorize ‘crypto assets’ based on risk. In Group 1 was tokenized traditional assets and stablecoins with effective stabilization methods. Group 2, which was deemed the riskier category, included most of what the industry trades in. The proposals limited the bank’s exposures to riskier Group 2 assets at 1% of Tier 1 capital.
So, in a nutshell, the industry that prides itself on being a superior alternative to fiat and banking was upset that it wouldn’t be able to easily get an injection of that sweet banking fiat to pump prices.
Truthfully, requiring banks to disclose what risky digital currencies and other assets they have on the books is only prudent. It is also perfectly in alignment with the sort of transparent world Bitcoin was designed to create. As sensible proposals for regulations keep coming, the Crypto Crime Cartel will have a harder and harder time.
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