The growth of crypto assets like bitcoin is a bad sign for the global banking system, warned the Basel Committee.
The banking supervision forum said that crypto assets had become popular despite exhibiting a high degree of volatility and risk. The Committee noted that while the new financial instruments were immature, they still presented many risks for banks. They were threats related to liquidity, credit, market, operations (including fraud and cyber threats), money laundering, terrorist financing, as well as legal and reputation risks. Excerpts from the newsletter:
“While the crypto-asset market remains small relative to that of the global financial system, and banks currently have [minimal] direct exposures, the Committee is of the view that the continued growth of crypto-asset trading platforms and new [commercial] products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.”
Destabilizing Established Banking System
The Basil Committee’s notice came in the wake of growing speculation around cryptocurrencies. Bitcoin activists pit the digital currency technology as a messiah against a so-called corrupt banking system. They believe a decentralized asset technology would distribute wealth more evenly and openly than a regular bank which could create money just by printing it.
Praet: As a central bank, we can create money to buy assets #AskECB https://t.co/zTQuU4y1ch
— European Central Bank (@ecb) March 12, 2019
The belief has led many to embark a crypto-enabled “financial revolution.” The protest aims to replace the global financial reserve, the US Dollar, with an asset whose supply is limited and methodological. If more people join such a demonstration, such that they dump government-issued money for a mathematically-born scarce asset, then it can eventually devaluate the established financial systems.
But, despite their anti-establishment stance, most of the people that are into cryptocurrencies are speculators. They want to encash maximum profits off their crypto investments. The Basel Committee is concerned about crypto holders’ mounting interaction with an established fiat-enabled financial system. According to them, the lack of regulations and excessive price volatility in crypto asset markets pose risks to banks that do business with these nascent markets.
Treating Crypto Exposure
The Basel Committee said it was monitoring developments in crypto assets, including their direct and indirect exposures to banks, to clarify how it would protect banking systems from their high risks.
“The Committee will in due course clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets,” the newsletter read. “It is coordinating its work with other global standard setting bodies and the Financial Stability Board.”
In the same breath, the Committee recommended banks to conduct a comprehensive analysis of the crypto-related risks. It also said that banks should employ a clear and robust risk management framework that could protect them from crypto asset exposures and related services.