The Basel Committee on Banking Supervision has published a consultation paper that proposes a disclosure table for reporting banks’ crypto holdings.
The proposal, which is currently out for comment, is an effort to standardise crypto disclosures and to “support the exercise of market discipline and help reduce information asymmetry between banks and market participants”.
In addition, the proposal also asks for feedback on measures to address window-dressing by banks in reporting crypto exposures.
Currently, the proposal is expected to be implemented in 2025, and feedback is due by the end of January 2024.
To break it down, the proposal actually has two separate frameworks for two different classifications of crypto assets.
The first category is for low-risk assets, such as tokenised traditional assets and stablecoins.
Assets that are simply digital representations of real world assets, and hold the same legal rights as holding the actual asset, or have some value stabilisation mechanism and backing will be put in this category.
Tokens that do not meet these standards, among other criteria, will be considered high risk assets, the second category.
These assets have a 1250 per cent risk weighting, and banks must hold an equivalent amount of fiat currency to back the value of cryptocurrency that they hold.
Banks will also be required to provide quantitative data on exposures to crypto assets and the corresponding capital and liquidity requirements. Banks will also be required to offer data on their activities linked to cryptocurrencies.
According to the Basel group, the new proposal is meant to help improve financial stability.
But how exactly is the proposal supposed to achieve this?
Certainly, banks disclosing what crypto assets they hold can help consumers and businesses make better decisions on whether any particular bank is at risk or vulnerable to economic shocks.
But beyond that, the impact is rather doubtful.
While the proposal does classify different types of crypto assets, it is questionable if simply disclosing crypto assets will actually prevent banking meltdowns.
After all, banks can continue to invest in cryptocurrency with expectations of future returns, and there is no limit as to how much investment they can do. All they need is to ensure that their investments are sufficiently backed.
If events like the Terra-Luna crash or the FTX crash occur, any bank that holds large quantities of Luna or FTT or any related token will still be in deep trouble.
The problem remains that crypto assets are not sufficiently used on a day-to-day basis at a level that is comparable to fiat currencies. In other words, utility remains the core issue of the problem.
Once cryptocurrencies become commonly accepted as just another form of money, the everyday usage of cryptocurrency as money will mean that demand for cryptocurrency will be high enough to provide stability for its own value.
But in order to get there, daily use needs to replace speculation as the primary reason for people buying into cryptocurrency.
The disclosures can help in reducing information asymmetry and making it clear exactly how risky certain banks are, but aside from that, they do not necessarily make any significant contribution. Will collapses like FTX be prevented? Certainly not. But can the impact be reduced? Perhaps slightly, as long as people do not buy into hype.
But at the very least, some degree of transparency into what banks hold in their portfolios can allow for customers to avoid being blindsided when crises do occur- if and only if we bother to keep track of what goes on.