US financial regulators are urging banks to be more cautious when dealing with crypto assets such as bitcoin.

The main risks for financial institutions included legal uncertainties and false or misleading communications from companies in the crypto industry, the US Federal Reserve (Fed), the FDIC deposit insurance fund and the OCC banking regulator jointly announced on Tuesday (local time).

Markus Fruehauf

Editor in Business.

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Even before Christmas, the Basel Committee on Banking Supervision had passed strict requirements for investments in crypto assets.

The oversight body of central bank governors and heads of financial regulators (GHOS) approved a set of measures that will force banks to have high equity buffers for crypto assets.

The Basel Committee, founded in 1974 and based at the Basel-based Bank for International Settlements (BIS), sets international standards such as the Basel III capital rules for banking supervision.

It includes the central banks and supervisory authorities from 27 countries as well as the European Central Bank for the European Union (EU).

The BIS, in turn, is considered the bank of the central banks and not only manages foreign exchange reserves for them, but also serves as a monetary policy think tank.

Security concerns in banks

The Basel decision and the collapse of various crypto companies such as the FTX trading platform now called the American supervisors into action.

They have security concerns about banks with business models that have been heavily focused on the crypto sector.

It is important that risks in this area that cannot be controlled do not spill over into the banking system.

The US supervisors announced that they would monitor crypto risks in the banking sector more closely.

They want to pay particular attention to the institutes' risk management in this area.

Crypto exchange FTX filed for bankruptcy protection on Nov. 11 after customers made large withdrawals in response to the stealthy move of $10 billion in deposits.

Founder Sam Bankman-Fried resigned as CEO the same day and is now on trial in the United States on fraud charges, which he denies.

The collapse of FTX has rocked the crypto world.

But even before that, the prices of many crypto assets had crashed last year.

While the Bitcoin price was still over $60,000 in November 2021, it is now less than $17,000.

The Basel Committee and the BIS have long been critical of digital assets because of the high fluctuations in value and the non-transparent structures.

The BIS is developing digital central bank money with the leading central banks.

Extremely high equity buffer

For particularly risky crypto assets, the Basel exclusion now requires a risk weight of 1250 percent.

In the standardized approach of the Basel capital framework (Basel III), for which the Basel Committee is responsible, the risk weight for loans is 8 percent.

So for a loan over 100 euros you need a security buffer of 8 euros, while risky crypto assets over 100 euros would require 1250 euros of equity backing.

In addition, the Basel Committee limits banks' potential investments in digital assets that pose high risks.

On the other hand, he recognizes that there are also high-quality crypto assets such as currency-based stablecoins or digital securities (tokens) based on actual assets.

For these, the banks can then apply the Basel capital rules as for ordinary loans or securities.

However, the crypto values ​​must then also pass risk tests.

Digital assets that do not belong to the first quality level must be backed by banks with 100 percent equity.