In a move aimed at enhancing transparency and mitigating potential risks, international regulators are considering requiring banks to disclose their cryptocurrency holdings. The proposal comes as regulators partially attribute recent banking collapses to the rapid rise of cryptocurrencies in the financial landscape.
The Basel Committee on Banking Supervision, responsible for establishing standards and norms for traditional financial institutions (TradFi), has already suggested that banks should allocate significant capital to cover their holdings of unbacked cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).
Following a turbulent year that witnessed the downfall of cryptocurrency exchange FTX, as well as digitally focused lenders Signature Bank and Silicon Valley Banks, the Basel Committee is now pushing for banks to disclose their cryptocurrency exposure to better control contagion risks.
A forthcoming consultation paper will introduce "a set of disclosure requirements related to banks' crypto asset exposures." These requirements will complement the existing capital requirements for digital assets, which were finalized in December. The Basel Committee, composed of bank supervisors from 28 global jurisdictions, including the United States, the United Kingdom, and the European Union, had previously expressed its commitment to monitoring cryptocurrency norms and making modifications if necessary. However, the idea of separate disclosure rules appears to be a new development.
In a report released recently, the Committee addressed what it deemed the "most significant system-wide banking stress" since the 2008 financial crisis, with cryptocurrencies being a focal point of concern. The sudden surge in the popularity of cryptocurrencies was identified as one of three structural trends indirectly responsible for the turmoil in traditional finance markets in March. The other two trends were the growth of non-bank financial intermediation and the emergence of faster digital payment systems allowing depositors to withdraw funds quickly.
Signature Bank, a New York financial institution that closed its doors on March 12, was specifically mentioned in the report. It was noted that the bank "failed to understand the risk of its association with and reliance on crypto industry deposits." Additionally, the report highlighted that the fear of cryptocurrency instability could lead other customers to withdraw their funds, contributing to the bank's collapse.
As the Basel Committee continues to scrutinize the cryptocurrency landscape, the introduction of disclosure requirements for banks signals a growing focus on regulating and monitoring the interactions between traditional financial institutions and the crypto market. These measures are aimed at safeguarding the stability of the global financial system in the face of evolving financial technologies and trends.