Cryptocurrency

FINMA Says Banks Should Have A Risk Coverage Of 800% for Crypto

crypto risk

FINMA is a Swiss Financial Market Supervisory Authority who has advised banks and other financial institutions to use a risk coverage for cryptocurrencies of 800 percent of the current market value, according to recent news.

What does a crypto risk coverage of 800 percent mean?

The major local news outlet Swissinfo saw a copy of a letter from FINMA to the Swiss Association on Audit, Tax and Fiduciary (EXPERTsuisse). In the letter, the agency reveals their stance on capital buffers for cryptocurrencies. FINMA is stating that financial players that crypto assets should be assigned a flat risk weight of 800 percent to cover market and credit risks.

“FINMA has recently received an increasing number of inquiries from banks, and securities dealers are holding positions in crypto assets and are subject to capital adequacy requirements, risk distribution regulations and regulations for the calculation of short-term liquidity ratios,” the letter.

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Experts argue that 800 percent is at the high end of the range regarding crypto risk weighting. The large coverage indicates that FINMA finds cryptocurrencies highly volatile and it puts crypto trading at the same level as hedge fund activity. Even though the volatility of cryptocurrencies has been flattening out during the past months, the history of high volatility still covers the asset class.

An 800 percent coverage means that for every bitcoin that is traded, at the current value of $6,000 per bitcoin, the bank must hold a value of $50,000 in reserve to cover for potential volatility. The coverage means that the bank must put aside a larger chunk of capital to cover potential losses of cryptocurrency positions than most other assets.

Big hurdles to overcome but encouraging signs

Even though the asset class has proven to be extremely volatile, there is a lot of good signs. More and more banks all over the world, but not least in Switzerland, are offering crypto related products to its clients. An example of this is SEBA Bank who hopes to win a license to operate full banking services bridging cryptos and traditional currencies. Despite the relatively high hurdles that banks need to pass to accept cryptos, the Bitcoin Association Switzerland reacted positively to the findings:

“It’s encouraging to see banks no longer turning down the increasing number of client requests for crypto services but asking for guidance and providing their input along the way,” BAS stated. “This is the Swiss financial center’s first step towards moving into the next decade where assets are no longer held in single, central custody but instead are held on the blockchain.”

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