Cryptoassets like bitcoin should be risk weighted at eight times their market value when banks calculate loss-absorbing capital buffers, according to a confidential letter from the Swiss financial regulator seen by swissinfo.ch.
The Swiss Financial Market Supervisory Authority has taken no official position on how to merge cryptoassets into Basel III capital requirements or liquidity ratios. But a letter to EXPERTsuisse, an association representing Swiss trustees and accountants, reveals the regulator’s current thoughts on the issue.
“FINMA has recently received an increasing number of enquiries from banks and securities dealers holding positions in cryptoassets and are subject to capital adequacy requirements, risk distribution regulations and regulations for the calculation of short-term liquidity ratios,” the letter, dated October 15, starts.
Until the Basel Committee on Banking Supervision makes global recommendations, FINMA is advising financial players that cryptoassets should be “assigned a flat risk weight of 800% to cover market and credit risks, regardless of whether the positions are held in the banking or trading book”.
According to experts, a risk weighting of 800% is at the high end of the range, indicating that FINMA considers the asset as volatile. This puts cryptoasset trading at the same level as hedge fund activity. Massive price fluctuations of bitcoin and other cryptocurrencies in the last year may have bottomed out in recent months, but the spectre of volatility stills hangs over the asset class.
Bitcoin currently trades at just over $6,000 a unit. But a bank must assume a value of around $50,000 for every bitcoin on its books when calculating the risk-weighted worth of its assets. This means it must put aside a larger chunk of capital to cover potential losses of cryptocurrency positions than most other assets.