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New Delhi, June 11: The Basel Committee on Banking Supervision, said on Thursday that cryptoassets such as Bitcoin pose additional and higher risks to banks and would be subject to a new conservative prudential treatment.

Cryptoassets are seen as a risk to financial stability because of their potential for money laundering and wild swings in prices that could lead to defaults and saddle banks with huge losses.

Under new prudential norms banks would be required to set aside more capital for covering the risk of any cryptoassets that they hold. This is required to safeguard depositors and other senior creditors of the banks to a loss that could occur due to a sudden crash in the prices of these assets which happens quite often.

The Reserve Bank of India has also flagged the high risk that the banking system faces due to the widely fluctuating prices of these digital currencies. The RBI had in fact banned cryptocurrencies but then the Supreme Court had intervened to allow limited use of these assets. The Basel committee's proposals come as a shot in the arm for the RBI as the government is working on legislation to ban these riskydigital currencies.

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.

The Basel Committee on Banking Supervision has issued a public consultation on preliminary proposals for the prudential treatment of banks' cryptoasset exposures.

"While banks' exposures to cryptoassets are currently limited, the continued growth and innovation in cryptoassets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment," the Basel committee said in a press statement issued on Thursday.

Given the rapidly evolving nature of this asset class, the Committee believes that policy development for cryptoasset exposures is likely to involve more than one consultation, the committee added.

The Committee welcomes comments on the proposals, which should be submitted here by 10 September 2021. All submissions will be published on the BIS website unless a respondent specifically requests confidential treatment.

Bitcoin prices jumped from about $10,000 last September to as high as $63,000 in mid-April. However, in the past month, prices have collapsed, falling back to $37,000, on the back of tougher regulatory scrutiny in China and Elon Musk's criticism of Bitcoin's high energy cost. Earlier Bitcoin prices had suddenly skyrocketed because Elon Musk invested $1.5 billion in the cryptocurrency through his electric car company Tesla Inc, and said Bitcoin would soon be accepted for payments.

However, Microsoft founder Bill Gates "sincere advice" to potential investors at the time was : "Unless you are as rich as Elon Musk you should not go in for buying Bitcoin."

Similarly, Warren Buffet, known as the most successful investor of all times, has serious reservations about Bitcoin. He believes that Bitcoin has no underlying value and has referred to it as "rat poison squared" and has said he won't ever buy the cryptocurrency. "I don't have any cryptocurrency and I never will," Buffett had said on CNBC.

(This content is being carried under an arrangement with indianarrative.com)

--indianarrative/

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Update: 11-June-2021