Federal Financial Analytics, Inc.

Global Agencies Concur: Bank Crypto Exposures Require Tough Sanction

January 14, 2020

The IMF has joined the Basel Committee in demanding new capital, governance,
and liquidity rules for bank crypto exposures. Intended to corral crypto, the rules could instead propel crypto-investment services outside the banking sector and empower Libra and like-kind ventures, no matter all the fears they raise.

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On Monday, January 13, the IMF issued a sweeping call for tough new standards governing bank exposures to crypto currencies, ventures, exchanges, and holdings. Although nominally a staff paper, the release is an emphatic policy call by the Fund for tough new standards along the lines on which the Basel Committee sought comment in December. As is often the case, regulatory and central-bank efforts to address stability risk are centering on banks because banks are the only providers clearly within the regulatory perimeter. If these banking standards advance – as seems likely in the near term – then crypto-asset and -currency adoption will increasingly migrate outside the banking sector with uncertain implications for risk reduction and investor protection.

The IMF and Basel statements follow the rapid acceleration of global work on crypto assets in the wake of Facebook’s stunning launch of Libra. Aimed at preventing contagion risk from regulated-bank exposures to speculative ventures, they could well stifle work such as JPMorgan’s proprietary token unless bank rules are carefully constructed to differentiate fiat-based tokens used for internal efficiencies from open-network ventures. Crypto-custody activities could also face significant strategic obstacles.

Specifically, the IMF wants strict firewalls between bank crypto and traditional activities as well as tougher prudential standards on direct crypto exposures. Crypto-coin issuance is considered the functional equivalent of deposit-taking that should be subject to like-kind standards, a construct with complex implications in nations such as the U.S. with limits on who may gather deposits and taxpayer-backed deposit insurance. Interestingly, the IMF also wants strict capital rules on crypto companies acting as counterparties.

The Basel Committee disagrees with the IMF’s conclusion that crypto-assets are the equivalent of currency, making it unclear if it would support deposit-like standards for crypto holdings. Its toughest standards might exclude internal crypto operations and custody, but its capital rules would be grueling for the point at which most banks would simply avoid trading- or banking-book crypto exposures.

So far, the regulatory field is wide-open for nonbanks. The International Organization of Securities Commissions last year laid out principles for crypto trading platforms, but nothing like the costly banking-sector rules has emerged in any global or U.S. regulatory arena. The Financial Stability Board has endorsed an activity-and-practice framework for financial technology in general terms, but nothing concrete has emerged nor is anything likely in the near term absent a crisis that propels regulators into rear-guard action.

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