Swiss Regulator Advises Banks to Apply 800% Risk Weighting to Cryptos

The Swiss Financial Market Supervisory Authority (FINMA) has advised banks that they should apply a risk weighting for cryptocurrencies such as Bitcoin of eight times (800 per cent) their market value when calculating loss-absorbing capital buffers.

The regulator has not yet taken an official position on how cryptocurrencies can be merged into Basel III capital requirements or liquidity ratios. However, in a confidential letter to EXPERTsuisse, an association that represents trustees and accountants in Switzerland, the regulator has revealed its current thoughts and guidelines on the issue of digital assets.

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The letter, which was seen by swissinfo.ch, starts by saying: “FINMA has recently received an increasing number of enquiries from banks and securities dealers holding positions in cryptoassets and are subject to capital adequacy requirements, risk distribution regulations and regulations for the calculation of short-term liquidity ratios.”

Adding that cryptocurrencies should be: “assigned a flat risk weight of 800% to cover market and credit risks, regardless of whether the positions are held in the banking or trading book”.

FINMA sees cryptocurrencies as volatile assets

A risk weight of 800 per cent is towards the high end of the range, according to experts. Ultimately, this figure reveals that FINMA considers this asset as volatile, which is a common characteristic of virtual currencies. Despite a bottoming out in recent months, over the past year bitcoin and other digital assets have experienced massive price fluctuations.

In the letter, FINMA advises banks and financial institutions that until the Basel Committee on Banking Supervision makes global recommendations, cryptocurrencies should be: “assigned a flat risk weight of 800% to cover market and credit risks, regardless of whether the positions are held in the banking or trading book”.

Also in the letter, the Swiss watchdog puts a 4 per cent cap on the trading activities of digital currencies of total capital, when adding together long and short positions. When financial institutions have reached this limit, FINMA insists they should report this.

The guidelines set out in the letter apply to cryptocurrencies held on a firm’s own books, instead of customer deposits that are held separately to its balance sheet.