Banks Could Be Required to Disclose Cryptocurrency Holdings as Regulators Blame Banking Collapses on Crypto
New plans have been floated that could require banks to disclose their cryptocurrency holdings as international regulators partly blame the collapse of banks on the sudden popularity of crypto. The Basel Committee on Banking Supervision, which sets norms for lenders in traditional finance (TradFi), has already stated that banks should issue potentially prohibitive capital for their holdings of unbacked crypto such as bitcoin (BTC) or ether (ETH).
Following a turbulent year that saw the collapse of crypto exchange FTX, as well as digitally focused lenders Signature and Silicon Valley Banks, the Basel Committee now wants to see lenders reveal their exposure to crypto assets in an effort to minimize contagion. A consultation paper, to be published soon, will propose a “set of disclosure requirements related to banks’ crypto asset exposures,” according to a statement from the Committee.
The Basel Committee, comprised of bank supervisors from 28 global jurisdictions including the U.S., U.K., and European Union, had previously stated that it would monitor crypto norms and modify them if necessary, but it has not previously suggested the implementation of separate disclosure rules. This new development reflects the growing concerns over the potential risks associated with cryptocurrency holdings within the banking sector.
In a report published by the Committee on Thursday, it outlined the “most significant system-wide banking stress” since the 2008 financial crisis, in which crypto was identified as one of three structural trends indirectly responsible for the recent turmoil in the traditional finance industry. Alongside the growth of non-bank financial intermediation and faster digital payment systems, the sudden popularity of crypto was cited as a contributing factor.
The report specifically highlighted the failure of Signature Bank, a New York financial institution that closed its doors on March 12, stating that it “failed to understand the risk of its association with and reliance on the crypto industry deposits.” Executives at Signature Bank did not acknowledge the potential impact of crypto instability on other customers, which could lead to significant withdrawals of funds.
These developments highlight the increasing scrutiny on the intersection of traditional banking and cryptocurrencies. Regulators are seeking to strike a balance between allowing banks to participate in the crypto market while ensuring safeguards are in place to protect against potential risks. By requiring banks to disclose their crypto holdings, regulators hope to increase transparency and reduce contagion in the event of a market downturn.
Cryptocurrency continues to evolve, and its impact on the traditional finance sector is still being understood. As regulators and standard-setters grapple with the challenges posed by this new asset class, it is likely that further regulations and disclosure requirements will be developed to ensure the stability and resilience of the global banking system.