FINMA Wants Banks To Peg Crypto With An 800% Risk Rating

November 7, 2018 by Kate Leaman

Swiss Financial Market Supervisory AuthoritySwitzerland has been so welcoming of cryptocurrencies that numerous crypto startups have made the country their base of operations.

The Swiss Financial Market Supervisory Authority (FINMA) surprised a lot of crypto companies when it issued a warning to banks and asked them to use an 800 percent risk weightage to cryptocurrencies and their market value.

The advice dished out by FINMA was to help banks calculate their capital buffers to absorb any possible loss.

FINMA has not finalized its official stance on how to integrate crypto assets in the Basel III requirements for capital or liquidity ratios. However, it has revealed some of its thoughts in a confidential letter sent to EXPERTsuisse, which is an association of accountants and trustees in Switzerland.

According to FINMA, it has received a lot of inquiries from banks and others who have started dealing with crypto assets. They wanted to know the exact details about how crypto assets are affected by various regulations that help manage the risk of investment. FINMA responded by saying that no matter whether it crypto assets are held in a bank or trading book, the risk weight should be calculated as 800 percent of its value.

This means that a single Bitcoin, which is currently valued at $6,402, needs to be calculated as if it is $51,000 when considering a loss. This means that banks and other financial institutions will need to set aside a lot of money to cover potential losses. It also shows FINMA views crypto assets as a very volatile asset. The risk assessment is supposed to remain until official word comes down from the Basel Committee on Banking Supervision, most notably when it meets later this month.

Additional Recommendations

FINMA also gave out additional requirements. One of these is a cap on crypto trading at four percent of total capital. This is after offsetting all of the long and short trading positions. FINMA also insisted that traders must send in a report if they ever hit the limit. FINMA may seem like it is anti-crypto right now, but it is merely doing a balancing act of recognizing the risk that crypto represents while welcoming it. For example, FINMA awarded the first Swiss crypto asset management license to Crypto Fund in October which would allow it to offer a range of financial products that track Bitcoin and other crypto assets.