Ties between traditional financial institutions and cryptocurrency were a hot topic last week, with an international governing body and U.S. lawmakers both addressing what to do about them.
The Basel Committee on Banking Supervision (BCBS) unveiled guidelines Friday for banks playing in the digital-asset space. That same day, the Financial Stability Oversight Council (FSOC) called for such regulation in its annual report.
The BCBS outlines standards for two groups of crypto assets. Group 1 are tokenized traditional assets and stablecoins. Group 2, meanwhile, are riskier products that are unbacked and don’t fit Group 1 standards.
Group 1 assets are subject to capital requirements based on underlying exposures as set out in the existing Basel framework. For Group 2 assets, the finalized guidelines limit bank exposure to 1% of their Tier 1 capital.
Chen Xu, an attorney at Debevoise & Plimpton in New York, told American Banker the Basel Committee regulations have little impact on U.S. banks because they’re prohibited from holding some of the assets regulated by the framework. Most crypto assets, he said, fall into Group 2.
The finalized framework “is significant, if for no other reason than it establishes a common baseline from which global regulators can build,” Xu told American Banker.
"If and when the U.S. and other jurisdictions ever do get around to introducing or implementing capital requirements for crypto asset exposures, they're going to turn to Basel for guidance," he said.
The FSOC, meanwhile, said in its report that lawmakers need to step up their game in writing laws that give federal regulators rulemaking authority over the spot market for crypto assets that are not securities. Steps should be taken “to address regulatory arbitrage, since crypto-asset entities offer services similar to traditional financial institutions but do not have a consistent or comprehensive regulatory framework,” the FSOC said.
Interconnections between the crypto world and banks “broaden the effects of shocks that originate inside the digital asset ecosystem,” the report said.
The reports come as potentially more than 1 million creditors worldwide roil in woes caused by the November collapse of cryptocurrency exchange FTX. Direct ties to FTX impacted several banks, including Moonstone Bank in Washington state.
Roughly 2.7 million FTX accounts were held by U.S. customers, according to bankruptcy filings. Sens. Elizabeth Warren, D-MA, and Tina Smith, D-MN, penned letters this month to the Federal Reserve and the Office of the Comptroller of the Currency, calling for the regulators to look at U.S. banks with assets caught up in the FTX fallout. Moonstone, the senators asserted, 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 accounting for “90% of the bank’s overall deposit base, amounting to $11.9 billion.”