Crypto players face a far harsher capital regime from international regulators than they thus far have enjoyed under Switzerland’s overseer. The dawn of a new regulatory arbitrage?
International regulators are proposing a risk-weighting of 1,250 percent against bitcoin and other digital assets on its books, in a proposal released by the Bank for International Settlements on Thursday.
This represents a sharp contrast from practice in Switzerland, where financial regulator Finma in 2018 reportedly told banks they should allot a risk weight of 800 percent until the BIS, the «bank for central banks», weighs in.
Rapid Industry Developments
Since then, the digital asset industry has grown in leaps and bounds. Switzerland has approved two crypto banks while signaling that it would deny a third one, Bitcoin Suisse, which aspired to a Swiss banking license.
Bitcoin Suisse has padded its bank guarantee several times in recent months following a boom in crypto trading, brokerage, staking, lending, and deposits. A spokesman for the Zug-based crypto broker didn’t comment on what the BIS proposal would mean for the company.
Inching Closer To Crypto Assets
Sygnum’s business model wouldn’t be directly affected by what the BIS is proposing, CEO Mathias Imbach told finews.com, «because the proposed risk model pertains to balance sheet positions, while we hold our client positions off-balance sheet». He said Sygnum is still examining how the proposals would affect business with crypto derivative products.
Seba said it would comply with any new regulatory requirements put into place, without responding specifically to the BIS’ proposals. Traditional Swiss financial players have also inched closer to the digital asset space, though none trade cryptocurrency outright.
Conservative For Risky Asset
A Finma spokesman said merely that its practice of requiring capital against crypto on balance sheets is «conservative in light of the risks and volatility in the asset class». Finma, which hasn’t formally adopted the 800 percent requirement into financial regulation, said it supports the Basel committee’s efforts to establish a global minimum standard.
The Swiss regulator was part of the Basel committee which laid the groundwork the proposal, which is now in public consultation until September 10. The current difference in Swiss regime and international proposals is reminiscent of a similar capital discussion following the financial crisis of 2008/09.
Swiss Vs. International Arbitrage?
However, that discussion was tinged with complaints from Swiss players of an unfair top-up to the international rules. This set of a series of veiled and even open threats by banks to play «regulatory arbitrage» by moving parts of their business to countries with less restrictive capital requirements.
The post-crisis era capital rules are widely acknowledged to have allowed U.S. banks to cement their competitive advantage in risk- and capital-intensive parts of banking. It remains to be seen how Finma, which is in the midst of a leadership transition, keeps in step with the BIS’s plans.