1 month ago

    Bitcoin’s new $3.6 Trillion boost that goes into effect on January 1, 2025

    Bitcoin’s new $3.6 Trillion boost that goes into effect on January 1, 2025
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      Hey Coincubs!

      Are you ready for some exciting news? The Bank for International Settlements’ (BIS) Basel Committee on Banking Supervision has recently finalized a policy that would place a 2% limit on banks’ Tier 1 capital held in bitcoin. 

      This is a huge deal for the crypto industry as it shows that, despite setbacks and price fluctuations, regulatory bodies are starting to recognize and address the increasing role of bitcoin and other cryptoassets in the financial world.

      The BIS had originally proposed a measly 1% reserve limit for global banks, but the banks just couldn’t live without their extra 4%. In the end, they settled on a compromise of 2%. According to data from 2020, if applied to all the banks in the world (which, let’s be honest, it’s a lot of banks), this would amount to a grand total of $3.6 trillion in bitcoin. 

      Wow, talk about a Bitcoin bonanza! We wonder if they’ll be able to fit all that Bitcoin in their vaults, or if they’ll have to use a Bitcoin storage solution (somebody in the crypto industry will be onto winner with that).

      Either way, it’s a good thing they didn’t go with the BIS’s original proposal – can you imagine the bank executives’ reactions if they had to make do with just 1%? They probably would have had a meltdown (pun intended).

      Prudential treatment – the way forward

      The policy, called “Prudential treatment of cryptoasset exposures,” provides a framework for banks to manage their exposures to cryptoassets in a way that aligns with traditional risk management practices. It breaks cryptoassets into two groups: Group 1 and Group 2.

      Group 1 cryptoassets are those that meet certain classification conditions and are subject to capital requirements based on the risk weights of underlying exposures as outlined in the existing Basel Framework. This includes tokenized traditional assets (Group 1a) and cryptoassets with effective stabilization mechanisms (Group 1b).

      Group 2 cryptoassets are those that fail to meet any of the classification conditions and are considered to pose additional and higher risks compared to Group 1 cryptoassets. This includes all unbacked cryptoassets and tokenized traditional assets or stablecoins that fail the classification conditions. Group 2 is further classified into Group 2a (hedging is permitted) and Group 2b (hedging is not permitted). Okay, got that?

      Banks must classify cryptoassets into these two groups and apply appropriate capital requirements based on the level of risk posed. Group 1 cryptoassets are subject to traditional risk-weighted asset (RWA) requirements, while Group 2 cryptoassets are subject to a more conservative capital treatment. Banks must also not exceed a total exposure limit of 2% of their Tier 1 capital to Group 2 cryptoassets, with a general requirement to keep this exposure below 1%.

      Key elements of the new BIS policy and why is important for Bitcoin

      Some key elements of the policy include:

      Infrastructure risk add-on  –  This is an additional capital requirement for Group 1 cryptoassets to cover infrastructure risk. It can be activated by authorities based on any observed weaknesses in the underlying infrastructure of cryptoassets.

      Redemption risk test and supervision/regulation requirement  – These measures must be met for stablecoins to be eligible for inclusion in Group 1. They ensure that only stablecoins issued by supervised and regulated entities with robust redemption rights and governance are eligible.

      Group 2 exposure limit –   A bank’s total exposure to Group 2 cryptoassets must not exceed 2% of its Tier 1 capital and should generally be lower than 1%. Banks that exceed the 1% limit will apply the more conservative Group 2b capital treatment to the amount by which the limit is exceeded. Exceeding the 2% limit will result in the whole of Group 2 exposures being subject to the Group 2b capital treatment.

      Some other elements of the policy include:

      Liquidity risk management – Banks must have appropriate policies and procedures in place to manage liquidity risks related to cryptoassets.

      Reporting and disclosure – Banks must report and disclose exposures to regulators as required.

      In summary, the BIS policy is a big deal for the crypto industry because it establishes a more formalized and regulated framework for banks to manage their exposures to cryptoassets. It is likely to increase confidence in the market and encourage more institutional and mainstream adoption, which could have a positive impact on the price of bitcoin and other cryptoassets.

      Take a look at this breakdown of the policy:

      GroupDefinitionCapital treatment
      1Meets classification conditions Traditional RWA requirementsTraditional RWA requirements
      2Fails classification conditionsConservative capital treatment

      Managing risk – improving confidence

      Overall, the BIS policy on the prudential treatment of cryptoasset exposures is a significant development for the cryptocurrency industry. It shows a recognition of the growing importance of cryptoassets and a willingness to address the associated risks in a consistent and transparent manner. This increased regulatory clarity and oversight is likely to have a positive impact on the price of bitcoin and other cryptoassets, as it may attract more institutional investors who have previously been hesitant to enter the market due to the lack of clear regulations. It could also encourage more banks to enter the market and offer crypto-related services, further increasing the demand for and adoption of cryptocurrencies.

      What is the Bank for International Settlements’ (BIS) Basel Committee on Banking Supervision and why is this such a big deal?

      The Bank for International Settlements (BIS) is an international organisation that promotes cooperation among central banks and provides banking services to them. The BIS also serves as a forum for international monetary and financial cooperation and as a bank for central banks.

      The Basel Committee on Banking Supervision (BCBS) is an organisation of central banks that sets global standards for the supervision of banks and other financial institutions. The BCBS was established by the BIS in 1974 and is headquartered at the BIS in Basel, Switzerland. The committee is made up of central bank representatives from countries around the world, and its primary focus is on promoting the stability of the international financial system.

      The BCBS has developed a number of important standards and guidelines for the banking industry, including the Basel Accords, which set out the minimum capital requirements for banks and other financial institutions. The committee also plays a key role in the development of international banking regulations and in the supervision of global financial markets.

      What are tokenized traditional assets and why they matter?

      Tokenized traditional assets are physical assets that have been represented as digital tokens on a blockchain. These assets can include things like real estate, artwork, collectibles, and other tangible items.

      Tokenized assets offer several benefits over traditional assets. For one, they can be easily bought and sold with greater speed and efficiency than traditional assets, which often require intermediaries and lengthy paperwork. Tokenized assets also have the potential to increase liquidity, as they can be easily traded on online marketplaces and exchanges.

      Another key benefit of tokenized assets is that they can potentially increase accessibility and reduce barriers to entry. For example, someone who might not have the financial resources to buy a piece of real estate outright could potentially invest in a tokenized version of that asset. This could open up new investment opportunities for individuals and allow for more diverse participation in the market.

      Overall, tokenized assets represent a new way of thinking about the ownership and transfer of traditional assets. They have the potential to streamline processes, increase efficiency, and make it easier for people to invest in and trade a wide range of assets.

      What is Liquidity risk management (hmm…FTX something something)

      Liquidity risk management is the process of identifying, assessing, and mitigating the risks that can arise from an organization’s ability to meet its financial obligations as they come due. These risks can include things like an inability to sell assets quickly enough to meet short-term cash needs, a shortage of cash or other liquid assets, or a sudden drop in the value of assets.

      Effective liquidity risk management is important for organizations of all sizes and in all sectors, as it helps to ensure that they have the financial resources they need to meet their obligations and avoid financial problems. This can include things like maintaining sufficient levels of cash and other liquid assets, diversifying funding sources, and having robust contingency plans in place.

      There are several tools and techniques that organizations can use to manage liquidity risk. These can include stress testing, which involves simulating different scenarios to assess the organization’s ability to meet its financial obligations under different conditions; liquidity ratios, which measure the organization’s ability to meet its short-term obligations; and limit setting, which involves setting limits on certain activities or exposures to manage liquidity risk.

      Overall, effective liquidity risk management is critical for the financial stability and long-term success of any organization. It helps to ensure that the organization has the resources it needs to meet its financial obligations and avoid financial problems, which can have serious consequences.

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