The Little Bank That Could

    31 Oct 2021

    The largest US banks are pleading with regulators for a way to work with cryptoassets. It has sparked a debate on what the boundaries for the new asset class should be. In the meantime, one American bank has already taken a risk and started working with crypto.

    On September 21, an advocacy group Financial Services Forum (FSF), representing eight of the largest financial institutions in the United States, submitted its proposal on cryptoasset access for banks to the Bank for International Settlements (BIS).

    Back in June, the BIS Basel Committee, a body setting global standards for banking regulation, published a document that proposed separating assets like stablecoins from more speculative investments like bitcoin. The Committee, which noted the “financial stability issues” in the cryptosphere, suggested different approaches to regulation depending on the type of cryptoassets the bank is handling.

    However, now the FSF group (which includes Bank of America, BNY Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo) has called on the BIS to ease its approach to risky cryptocurrencies. “We believe that the presented proposals are so conservative and simplistic that they practically prohibit the banks’ participation in the cryptoasset markets,” – states the FSF letter.

    It also suggests that the BIS should encourage banks to become more involved in the crypto business, thus making the new asset class “visible” to banking regulators.

    The Basel Accords are implemented in the United States by the Federal Reserve System, the Office of the Comptroller, and the Federal Deposit Insurance Corporation. According to the BIS proposal, cryptocurrencies that are not a tokenized version of a traditional asset or do not have a “stabilization mechanism” for their value will generally be classified as a “Group 2” asset that carries “additional and increased risks”.

    The proposal means that stablecoins will most likely not be put in Group 2, but bitcoin will.

    The Basel Committee will assign the Group 2 assets a risk-weighted ratio of 1250% when estimating bank’s capital requirements (a key indicator calculated as bank’s assets minus its liabilities).

    A higher risk-weighted asset ratio requires the bank to hold more capital to insulate depositors from any losses they may suffer from owning such assets. “In other words, there should be enough capital to absorb the full write-off of all high-risk crypto assets without exposing depositors and other bank creditors to losses,” – says the Committee proposal.

    At 1250%, the risk-weighted ratio for cryptoassets will be much higher than for residential mortgages (usually 50% to 100%) or junk-rated corporate bonds (usually 100%). However, the banks believe that the world of cryptoassets is too diverse to apply one risk-weighted ratio for the entire asset category. In addition, the regulatory framework should consider all hedges carried out by the bank. “If the prudential framework for cryptoassets is too punitive for a bank to participate in this market, it could stifle the competition”, – claims the FSF.

    But while larger banks are trying to negotiate with regulators, other, smaller ones, are starting to work with cryptoassets at their own peril and risk. In early September, Vast Bank in Tulsa, Oklahoma, became the first commercial bank to allow its customers to make cryptocurrency transactions. The bank launched its Crуpto Banking service, enabling clients to buy and sell certain cryptocurrencies – bitcoins, Ethereum, Cardano, Filecoin, Litecoin, Orchid, Algorand, and Bitcoin Cash, using a traditional bank account. The Crypto Banking service is available through a special mobile app.

    According to the bank’s CEO Brad Scrivner, their survey showed that more than 60% of the bank’s customers are interested in cryptocurrencies: “We get to know our clients and listen to them. And many now are talking about cryptocurrencies. Our clients ask why they cannot safely purchase bitcoins using their bank account. At the same time, they express concern over the reliability and safety of other platforms.”

    Brad Scrivner also admitted that it was not easy to get approval from the US regulators because of certain apprehension from the Federal Reserve, always skeptical and critical towards cryptocurrencies. Still, in the end, Vast Bank became the first bank in the United States with federal approval to offer its clients the ability to buy, sell and store cryptocurrencies using their bank accounts.

    I would venture a guess that American financial regulators simply decided to make a test subject out of a small provincial bank to see what difficulties the bank itself or its clients will face, how much excitement it will generate, and what will happen with the initiative going forward.

    Overall, this is good news. We see that the largest banks are more willing to work with crypto, not to fight it. And not as institutional investors but as players in the retail market. It’s not hard to see why that is. Recently, a study of financial services by The Ascent company showed that more than 20% of adult Americans who have never owned any cryptocurrency (over 50 million people) would likely buy it next year. So there are many banks in the USA ready to follow the example of Vast Bank.

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