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Bitcoin Ruling Roils Crypto World Seeking Regulatory Cl...

Business Maverick

Business Maverick

Bitcoin Ruling Roils Crypto World Seeking Regulatory Clarity

A token representing Bitcoin virtual currency sits among cables and LED lighting inside a 'mining rig' computer in this arranged photograph in Budapest, Hungary, on Wednesday, Jan. 31, 2018. Cryptocurrencies are not living up to their comparisons with gold as a store of value, tumbling Monday as an equities sell-off in Asia extended the biggest rout in global stocks in two years. Photographer: Akos Stiller/Bloomberg
By Bloomberg
11 Jun 2021 2

International banking regulators’ decision to classify Bitcoin as the riskiest of assets dragged cryptocurrencies further into the mainstream financial world.

It also made it extremely costly for banks to hold digital tokens on their balance sheets, potentially delaying crypto’s wider adoption.

The Basel Committee on Banking Supervision proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. Bitcoin jumped on the announcement, then erased the gains. It was trading around $36,200 as of 10:30 a.m. in Hong Kong on Friday.

“The only consistency has been the volatility — it’s been big spikes, tons of enthusiasm, followed by big selloffs,” Ross Mayfield, investment strategy analyst at Robert W. Baird & Co., said of Bitcoin’s moves. “If you believe in it you’re probably to stomach the volatility, but if you’re just in it because it seems like the hot way to get a quick buck, that volatility is going to be hard to deal with.”

Bitcoin is off its mid-April record high

The ruling sparked a bevy of reactions across Wall Street and other financial centers worldwide. Here’s a sampling:

Luke Sully, CEO at treasury technology specialist Ledgermatic:

“It’s a piece of news that both advocates and critics of Bitcoin will declare as a win. It demonstrates that Bitcoin is now a recognized asset class with risk management parameters for the banks, but these same parameters could be a potential deterrent given the onerous capital requirements that may make it an unpalatable business,” he said. “There are a few underlying assumptions in this risk weighting, the most obvious being that the price may go to zero and investors could lose their full allocation. The capital requirements don’t protect the banks clients from transaction, settlement and FX volatility either.”

David Tawil, president of ProChain Capital, a crypto hedge fund:

To me, this whole thing, along with the IMF, is just a way for those entities to get involved in the conversation. In terms of putting these requirements it’s going to go ahead, and at least for now, take traditional banks that are traditional regulated by these regulatory entities essentially out of this game and that will allow for more and more alternative players, who are not regulated, to go ahead and to pull further ahead,” he said. “A regulator has very little upside and enormous downside — it’s like being a policeman. You want to protect people. So the furthest you can go in terms of lodging measures that stop activity, the better. And so, I think that they are for the first time inserting themselves. This certainly does not mean the end of cryptocurrency, the end of Bitcoin.”

Marc Chandler, chief market strategist at Bannockburn Global Forex:

“I don’t think these things are good or bad themselves — it depends on what the objective is,” he said. “It’s not decentralized, it’s highly concentrated. Crypto was born in an age in which we had very extreme disparities of wealth and income — how can it not reflect that? The bulk of Bitcoin that’s owned by wallets have more than 100 Bitcoins, that’s more than $300,000 — how many Americans have $300,000 to put into crypto as opposed to retirement money?”

Matt Maley, chief market strategist for Miller Tabak + Co.:

“Obviously tougher capital requirements cause banks to have more capital on hand — that can have an impact on their earnings. The committee is saying because of risks involved — cryptocurrencies are very volatile — you have to have more capital on hand to protect against declines,” he said. “If it’s going to cost banks more to hold these cryptocurrencies on their books, they’re theoretically going to be less likely to hold the same kind of size as they otherwise would.”

Wells Fargo analyst Mike Mayo said in a Bloomberg TV interview with Matt Miller:

“It is getting hammered, but you know what? It’s getting treated like any other higher-risk asset like subprime loans, or CDOs, or derivatives, or structured products. And it is a new product. It’s untested through economic cycles. It’s untested through liquidity.”

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  • The Basel ruling recommends a roadmap to regulatory certainty. Which was absent before. It is a very good thing for digital currencies, even with its suggested high risk rating (which is appropriate at this early stage in its life). It opens the way for national regulators to let banks play in the crypto space, which given the 1.5 trillion currently sloshing around in crypto asset ownership, is a place they might well want to go fishing.

    • Does anyone remember the sub-prime mortgage and associated derivatives crash of 2007-2008? Letting banks & the financial sector anywhere near this mirage currency is asking for trouble in a couple of years time (or less).

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