The rising popularity of cryptocurrencies, which international authorities partially attribute to financial crises, will require banks to declare their holdings of cryptocurrencies under new measures floated Thursday.According to the Basel Committee on Banking Supervision, which establishes standards for traditional finance (TradFi) lenders, banks should release potentially prohibitive capital for their holdings of unbacked cryptocurrency like bitcoin (BTC) or ether (ETH).
The industry standard-setter is now asking lenders to disclose their exposure in an effort to stop the spread of the crisis after a difficult year that witnessed the demise of digitally oriented lenders Signature and Silicon Valley Banks, as well as cryptocurrency exchange FTX.
A consultation paper to be published soon will propose “a set of disclosure requirements related to banks’ crypto asset exposures,” complementing existing capital requirements for digital assets that were finalized in December, the Committee said in a statement.
The Basel grouping, which consists of bank regulators from 28 countries across the world, including the United States, the United Kingdom, and the European Union, has previously stated that it would examine crypto regulations and alter them as necessary, but it does not appear that it had previously raised the idea of separate disclosure rules.The Committee provided some insight into what it dubbed the “most significant system-wide banking stress” since the 2008 financial crisis, with cryptocurrency at the center of the debate, in a report released on Thursday.
Along with the expansion of non-bank financial intermediation and quicker digital payment technologies that allow depositors to withdraw quickly, the sudden popularity of cryptocurrencies was also identified as one of three structural developments that were indirectly responsible for the March TradFi upheaval.
Signature Bank, the New York financial institution that shuttered on March 12, “failed to understand the risk of its association with and reliance on crypto industry deposits,” and executives didn’t acknowledge that fears over crypto instability might also encourage other customers to withdraw funds, the report said.