Swiss Regulator Instructs Banks to Assign 800 Percent Market Value Risk Weighting to Cryptoassets

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The Swiss Financial Market Supervisory Authority (FINMA) has instructed banks in the country who handle cryptocurrency to weight cryptoassets at eight times their market value when calculating loss-absorbing capital. According to a secret letter quoted by swissinfo.ch in a story published on November 5, 2018, the regulator has imposed the new rule to protect the stability of the Swiss banking system, in what the market will likely take as a vote of no confidence in crypto’s long-term stability.

FINRA’s Newfound Skepticism

While FINMA has a stated position on cryptocurrencies which is broadly permissive of banks in the country handling the asset class, it has made no effort to integrate cryptocurrencies into Basel III capital requirements or liquidity ratios. The October 15 letter, addressed to EXPERTsuisse gives an insight into the regulator’s exact thoughts regarding cryptocurrency.

An extract from the letter reads:

“[Cryptoassets should be] assigned a flat risk weight of 800 percent to cover market and credit risks, regardless of whether the positions are held in the banking or trading book”.

A risk weighting is used as a measure of an asset’s volatility and potential to compromise a bank’s capital base. As a rule of thumb, the higher the risk weighting, the less of the asset should be held by a bank. An 800 percent risk weighting signifies clearly that FINMA sees bitcoin and other cryptocurrencies as a significant volatility risk which it does not want Swiss banks exposed to.

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With the new regulation, this means that even though bitcoin currently trades around $6,400, banks holding bitcoin must value it at over $50,000 when calculating its risk-weighted worth. The significant implication of this is that the bank must set aside a more substantial amount of capital to repay itself in the event of trading losses in cryptocurrency positions when compared to other assets.

In addition to this, FINMA’s letter also prescribed a crypto trading cap of 4 percent of total capital held by a bank, and even institutes a mandatory reporting requirement for banks who reach the 4 percent limit. Even more damningly, it has also specified that cryptoassets must not be classified as highly liquid assets, which means that banks with more massive proportions of crypto holdings potentially will have lower liquidity ratios.

Reasons for Optimism

Against this backdrop, however, it is pertinent to note that Switzerland is by no means an unfriendly jurisdiction to cryptocurrency trading and crypto innovation. While FINMA’s new rules may have a significant impact on Swiss banks, some new-generation banks specializing in crypto finance such as SEBA Crypto AG remain largely untouched.

Speaking to swissinfo.ch, SEBA CEO Guido Bühler said:

“SEBA acknowledges the guidelines which may be justified for certain models on how crypto assets are handled and held. We believe that the guidelines have a limited impact on SEBA’s business model.”

Bitcoin Association Switzerland also responded to the news with optimism stating that the move represents baby steps on Switzerland’s part toward moving into a future dominated by decentralized asset custody, as against the world-famous centralized traditional Swiss banking model.