Updated: Jun 15
June 14, 2021 | The global bank regulatory community delivered a resounding rejection of the world of bitcoin and other “untethered” crypto tokens last week. Tokens are “tethered” when they are tied to the value of a real currency. By applying the highest possible capital weighting to bitcoin, the Bank for International Settlements (BIS) essentially put crypto assets that are not fixed in value against a traditional currency into the financial bait bucket under Basle III/IV.
“When the only tool you know how to use is a hammer, everything looks like a nail,” remarked our friend Ed Kane, Professor of Finance at Boston College, upon hearing the news.
In the world of global bank capital requirements, 8% capital vs assets is the standard that is set equal to 100% risk weight. Capital risk weightings go from “zero” for most government debt exposures, to 20% risk weight for parastatal entities such as Fannie Mae and Freddie Mac, to 50% for secured loans on real estate, to 100% for typical unsecured corporate exposures. By assigning a 1,250% risk weight to crypto assets, the BIS is essentially saying “no thanks" to bitcoin.
The impact of this impending decision will be felt widely. First and foremost, new banks such as Square (NYSE:SQ) and SoFi Technology (NYSE:SOFI), both of which have acquired banking charters, must now decide whether to remain in the world of non-banks. To actually adopt a banking charter, as SQ has done, means leaving the world of crypto assets behind.