BIS plan requires banks to disclose crypto holdings.

BIS plan requires banks to disclose crypto holdings.

Cryptocurrency Holdings to be Disclosed by Banks as Basel Committee Blames Banking Collapses on Crypto

The world of cryptocurrencies has been steadily growing over the past few years, gaining both popularity and recognition. However, this newfound enthusiasm has not come without its risks, as highlighted by the Basel Committee on Banking Supervision. The committee, which sets standards for traditional finance institutions, has expressed concerns over the impact of unbacked cryptocurrencies, such as Bitcoin and Ethereum, on the stability of the banking sector.

Following a turbulent year that witnessed the collapse of major cryptocurrency exchange FTX, as well as digitally focused lenders Signature and Silicon Valley Banks, the Basel Committee is now proposing a new set of disclosure requirements for banks. These requirements would compel banks to reveal their exposure to cryptocurrencies, ultimately aiming to minimize the risk of contagion.

Banks have already been advised by the committee to allocate substantial capital for their holdings of unbacked digital assets. However, the introduction of separate disclosure rules signifies a more comprehensive approach towards mitigating potential risks associated with cryptocurrencies.

The Basel Committee, which comprises bank supervisors from 28 global jurisdictions, including the United States, United Kingdom, and European Union, has previously focused on monitoring crypto norms and making modifications when necessary. However, the idea of implementing separate disclosure rules had not been previously emphasized.

In a recent report, the Basel Committee highlighted the “most significant system-wide banking stress” since the 2008 financial crisis, with cryptocurrencies being a major contributing factor. The sudden popularity of cryptocurrencies was identified as one of three structural trends indirectly responsible for the turmoil witnessed by traditional finance during March. The other two trends were the growth of non-bank financial intermediation and the rise of faster digital payment systems enabling quick withdrawals.

To exemplify the consequences of ignoring the risks associated with cryptocurrencies, the report cited the case of Signature Bank, a financial institution based in New York, which closed its doors on March 12. The bank had failed to comprehend the risks associated with its reliance on deposits from the crypto industry. Furthermore, executive members failed to acknowledge that concerns regarding crypto instability might lead other customers to withdraw their funds.

The Basel Committee’s move towards requiring banks to disclose their cryptocurrency holdings is a significant step towards reinforcing the stability and transparency of the banking sector. By shedding light on banks’ exposure to cryptocurrencies, potential risks and vulnerabilities can be better managed, allowing for more informed decision-making and risk assessment.

The introduction of disclosure requirements complements the existing capital requirements for digital assets that were finalized in December. This holistic approach will ensure that banks have a comprehensive understanding of their exposure to cryptocurrencies, enabling them to take appropriate measures to address any potential risks or contagion effects.

In conclusion, the Basel Committee’s proposal to require banks to disclose their cryptocurrency holdings is an essential step in protecting the stability of the banking sector. By increasing transparency and understanding of potential risks associated with cryptocurrencies, banks can make informed decisions and actively mitigate any threats to their financial stability. Only through comprehensive disclosure and risk management can the banking industry fully embrace the opportunities offered by the blockchain revolution while safeguarding its integrity and stability.