The BIS's draft proposals for capital regulation of stablecoins and cryptocurrencies were widely misunderstood in the crypto community. Much of the misunderstanding, as ever, was about the nature of bank capital. It's not "reserves", it's equity. 1/
If you aren't clear on the difference between reserves and capital, read this. It's ten years old, so some of the regulatory details are now out of date, but the basic principles are right.…
And if you want to understand why the BIS's capital regulation proposals are a BIG DEAL for stablecoins in particular, read this.… /3
The widely-reported 1250% capital weighting for Group 2 cryptoassets is therefore the amount of equity that must be allocated to cover the bank's exposure to these cryptoassets, not the amount of cash or other assets it must hold. /4
Bank capital is often called "loss-absorbing" capital. This means that in the event of the asset price collapsing, the bank's shareholders bear the losses, not its depositors or senior creditors. You could regard it as a form of collateral. /5
The Basel Committee has decided that because cryptocurrencies have no intrinsic value and are highly volatile, the risk of total loss is considerable, and banks must therefore have sufficient equity to ensure that a total loss would be borne only by shareholders. /6
(Banking geeks, I am deliberately simplifying capital requirements somewhat in this thread. I haven't forgotten about subordinated debt and AT1s, so don't shout at me!)
The 1250% capital weighting for cryptoassets looks wild, but is explained in this footnote to the Basel Committee's paper:
So for banks that meet the Basel minimum capital requirement, the 1250% weighting is equivalent to 100% equity collateralisation of Group 2 cryptoassets. However, most banks nowadays have more capital than the 8% minimum. For them, the 1250% weighting is overcollateralisation. /8
To give an example: in 2020, JP Morgan's capital ratio was 13.1%. Applying this to the Basel formula I tweeted earlier translates into capital of $163.75 for every $100 of Group 2 cryptoasset exposure. That is significant overcollateralisation. /9
This capital requirement applies to both short and long positions. There's also a recommendation that supervisors apply an additional capital requirement to short positions because potential losses are unlimited. /10
To remind you, bank "capital" is EQUITY, not cash or other assets. It is the gap between assets and liabilities on the balance sheet. The larger the gap, the less likely that creditors or depositors will have to take losses in the event of asset price collapse. /11
So, if the BIS proposals are accepted, banks won't be able to hold or trade cryptocurrencies or unregulated stablecoins on their own account unless the gap between assets and liabilities is so large that there is zero risk of losses for senior creditors and depositors. /11
A number of people have correctly pointed out that this means banks wouldn't be able to take leveraged positions in crypto. That's true, but it's wrong to regard this as a good thing for banks. Taking leveraged positions is the entire business model of a bank. /12
So if they can't take leveraged positions, there is absolutely no point in holding or trading the asset on their own account. These proposed regulations therefore amount to banning banks from trading crypto without actually banning them, if you see what I mean. /13
And in case this isn't clear enough, the BIS also gives supervisors the option of actually banning banks from holding or trading crypto on their own account: /14
So we can summarise the BIS's proposals regarding banks holding or trading cryptocurrencies and unregulated stablecoins on their own account thus: "DON'T"
To be clear, these regulations do not prevent banks acting as custodian for crypto assets, as some in the crypto community seem to think. Nor do they prevent banks holding and trading crypto on behalf of clients. They are ONLY concerned with banks' own-account activities.
These proposed capital regulations also don't prevent regulated banks acting as settlement banks for the fiat side of crypto transactions. However, AML/KFC regulations make this problematic.
So, draconian though these capital requirements are, they don't completely prevent banks from participating in the crypto space. They just limit their activities to custody, asset management and settlement.
And they also don't apply to all crypto assets. There's a different set of rules for tokenised assets and regulated stablecoins. I'll discuss these separately, because they are arguably much more important than the headline 1250% for cryptocurrencies and unregulated stablecoins.
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More from @Frances_Coppola

10 Jun
More on those BIS capital regulations. Algorithmic stablecoins will incur the full 1250% capital weighting. So will stablecoins backed by cryptocurrencies and other stablecoins (here's looking at you, DAI).
For asset-backed stablecoins, the disclosure requirements are way tougher than any stablecoin meets at the moment afaik.
note that the exact asset backing of the stablecoin must be disclosed. AFAIK only Gemini provides this at the moment. The rest fudge it one way or another.
Read 7 tweets
9 Jun
My unpopular opinion (well, perhaps popular in some circles): the President of El Salvador's decision to adopt BTC as an alternative to the USD for transactions in his country is actually quite sensible. 1/
The problem for "dollarised" countries is that because they do not have their own currency, they must dance to the monetary and fiscal tune of whichever country issues the country they use. I say monetary AND FISCAL because of the overriding need to maintain a positive BOP. 2/
But breaking the dollar dependence by issuing their own currency is not easy. Dollarised countries usually have a history of political and economic instability. Getting the world, or even their own people, to accept a currency issued by the goverment is hugely problematic. 3/
Read 10 tweets
8 Jun
The journalist @davidhencke, mouthpiece of the #backto60 campaign, has leaked the provisional findings of the Ombudsman regarding the @WASPI_Campaign's maladministration claims. 1/
His action appears to contravene the Parliamentary Commissioners' Act 1967, which requires investigations to be conducted in private and information provided to the investigation to be kept secret. ImageImage
Hencke even directly quotes passages from the PHSO's letter to claimants. This seems to violate the legal requirement for privacy. 3/
Read 12 tweets
31 May
@zeroshorts @davidgerard @patio11 Yes, and that happened in 1967, not 1971, that's my point. US inflationary policies contributed, but it was the UK's devaluation of the pound that caused the failure of Bretton Woods.
@zeroshorts @davidgerard @patio11 I remember the devaluation, just about. The famous "pound in your pocket" speech.
@zeroshorts @davidgerard @patio11 But I don't think people realised then how disastrous it was for the global financial system. And they don't now either. The connection between the UK's devaluation and the US's suspension of gold convertibility has been lost in the mists of time.
Read 35 tweets
30 May
To all those calling me stupid for saying natural gas is a fossil fuel: read and learn.…. Image
And if you don't believe that source, try this one instead. The US Energy Information Administration.… Image
And here's the National Geographic:… Image
Read 4 tweets
6 May
This is the most ridiculous thing I have seen today. 10x leverage margin trading of a pair that is hard-pegged at par.
And furthermore, one of the pair is supposedly 100% backed by reserves denominated in the other. Talk about circular.
I can't think of a better way of revealing to the whole world that your 100% reserve stablecoin doesn't have 100% cash reserves.
Read 7 tweets

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