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FINMA reportedly sets tough restriction on bank crypto trading

FINMA reportedly sets tough restriction on bank crypto trading

23 November 2018

Swiss Financial Market Supervisory Authority FINMA is said to put restrictions on banks that crypto assets risk should be weighted eight times their market value when it comes to calculating loss-absorbing capital buffers. Such news comes from confidential letter obtained by swissinfo.ch.

Confidential news

Officially, FINMA gave no stance on how to manage cryptocurrencies in terms of Basel III capital requirements or liquidity ratios. Swiss news webpage has seen a letter sent by the FINMA to EXPERTsuisse, an association of Swiss accountants and trustees that has contained FINMA’s views on what risk crypto-assets pose and how to weight it. The letter is dated on October 15th and is stated to be an answer for growing number of enquiries from securities dealers and banks that have positions in crypto-assets. If those assets are subject to risk distribution regulations and capital adequacy regulations, there is a need to calculate a short-term liquidity ratio and asses risk posed by holding such crypto-capital.

The highest possible weight of risk

Swiss financial regulator assigned a flat risk weight of 800% to cover credit and market risks. This is regardless of whether positions on cryptocurrencies are held in trading book or banking book. This weight of risk is the highest possible according to experts and as such it puts crypto-assets trading at the same level as hedge fund activities. Probably FINMA assessed the possible risk of holding crypto-assets based on huge price fluctuations and changes of exchange rates of Bitcoin and other digital currencies in the last year. Even though fluctuations have become less violent in recent months, the perspective of volatility is still very much real when it comes to asset class. At the current moment bitcoin is trading at just over $6000 which is around 6000 Swiss Frans per unit. However a bank must use a value of around $50,000 for every Bitcoin when it comes to calculating the risk of the assets and putting it in the books. It means the financial institution has to put aside a huge chunk of capital in case of necessity of covering potential losses triggered by cryptocurrency positions. This capital is much bigger than in cases of other assets. Additionally, FINMA has put a trading cap of 4% on crypto trading operations when it comes to the sum of long and short positions. Will other countries follow FINMA path in the matter of assessing risk of holding capital in cryptocurrencies? Swiss regulator has suggested in the confidential letter that other countries may take even tougher stance on the matter.

Whom it may concern?

Obviously, the tough position on assessing crypto-capital risk hits the most traditional financial sector like banks and security dealers that hold crypto-assets. However, fintech branch may also be impacted. In Switzerland there are appearing more and more crypto banks that hope to win licence and operate as banking services providers that will connect traditional currencies, like Swiss Franc and cryptocurrencies.

Basel committee meeting

Over the weekend of November 25-26, the Basel Committee will hold its meeting and is likely to give its position on dealing with cryptocurrencies in the financial market. However, FINMA is not expected to publicly address the issue until global regulations are agreed on and put forward.

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