US Isolating Itself From Other Central Banks: Basal Committee Crypto Report
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US Isolating Itself From Other Central Banks: Basal Committee Crypto Report

Guidelines on institutional crypto engagement have been released, but the Federal Reserve is not listening.
Neither the author, Kai Morris, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

The Basel Committee on Banking Supervision (or BCBS), is an international banking authority “with 45 members comprising of central banks and bank supervisors from 28 jurisdictions”, has recently updated its stance on cryptocurrencies, outlining guidelines for central banks wanting to gain exposure to digital assets. The Bank of England’s Deputy Governor, Sam Woods, has spoken positively on this position and said the UK will comply. However, it appears the US is not in agreement. 

Basel’s Approach to Crypto

The Basel Committee, report on crypto-assets, published on September 10th, gives greater insight into how the organization views the industry. While the report, at times, paints the industry in a negative light, noting they have “the potential to raise financial stability concerns and increase risks faced by banks” and that they “[give] rise to a range of concerns including consumer protection, money laundering and terrorist financing, and their carbon footprint”, the overall message of the document appears to be one trending towards adoption.

Basel is clearly acting cautiously with cryptocurrencies, but at the same time, by creating detailed guidelines on how banks should integrate with them, it is also obvious they see the importance of the industry. Examining the document reveals the committee has split crypto assets up into two groups. 

Group one is comprised of tokenized traditional assets. This appears to include synthetic assets, such as those hosted on the Wall Street Bets DApp, cryptocurrencies backed by precious metals, and any other traditional asset that can also be represented on-chain. 

It also includes any cryptocurrency which has “stabilization mechanisms”, otherwise known as stablecoins. Basel’s specific wording here leaves room for stablecoins, which are not necessarily backed by any fiat currency. This is important, as recent discussions around the relationship between fiat and crypto suggest the market could move towards creating stablecoins that do not reflect traditional currencies. 

There is also room for interpretation when it comes to NFTs. While most NFTs represent purely digital works, physical art has been tokenized before, such as how Russia’s State Hermitage Museum auctioned its artworks on Binance’s marketplace. Real estate has also been tokenized in the past

There is some debate as to whether art is a traditional asset class, whereas real estate certainly is. Would these get treated as group one, then? By Basel’s guidelines, it appears so. 

Group two is more broad, and essentially captures all crypto assets that do not fit into group one– this includes Bitcoin, Ethereum, and practically all cryptocurrencies considered to be volatile. The report states, for banks to be best protected against harm from the volatility, each group two asset they hold should be matched with a 1250% weighting of fiat applied to it. 

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Are Banks Ready to Listen?

While the Basel report contains relatively conservative guidelines and makes note of the dangers of getting involved with crypto, the overall message appears to be one of positivity. The organization seems to be cautiously encouraging banks to get involved with crypto assets by providing rules on how they can do so in a safe manner. 

The question now is whether central banks will follow these guidelines and jump into the industry. The Bank of England appears to be in favor of Basel’s ideas, with the bank’s Deputy Governor, Sam Woods, calling the report “quite sensible”, and further adding

“At this point our banks don’t have material exposures to crypto but you can see over time, there is an investor appetite and not just retail, also institutional investor appetite to have a little bit of this stuff”. 

It is refreshing to see the UK give this report the thumbs-up, as the country has a growing number of crypto retail investors. As of June, over 4% of UK adults owned some form of cryptocurrency. In addition, the FCA and the Bank of England have given the green light for using blockchain technology as a means of handling regulatory reporting and compliance checks. 

However, on the flip side, it seems the US is not following suit – usually, America’s anti-crypto rhetoric comes from the SEC, but the Federal Reserve has also shown disdain in the past. The Fed Chair, Jerome Powell, has argued for a digital dollar, not as a way to embrace the industry, but as a means of replacing the need for all other cryptocurrencies in the country. Previously, he has said that “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital U.S. currency”.  

At the moment, it seems highly unlikely the US will follow these guidelines and safely exposure their central bank to the industry. This is extremely disappointing, as it suggests the country will fall behind others when it comes to adoption. The Federal Reserve is yet to issue any revised statements on cryptocurrency since the Basel report came out, so there is time for them to U-turn and embrace the industry, but at the moment it seems unlikely.

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