Swiss Regulator: Cryptoasset Risk Coverage to Be Estimated At 800% Of Market Value

  • Switzerland's financial regulator, FINMA, has instructed local financial institutions to estimate risk coverage for cryptoassets at 800% of their market value.
  • FINMA considers cryptoassets to be a highly volatile and risky asset class.

Switzerland’s financial regulator, the Financial Market Supervisory Authority (FINMA), has  reportedly recommended that cryptoassets should be “assigned a flat risk weight of 800% to cover market and credit risks.”

FINMA also advised local banks and other financial institutions to estimate risk coverage for all digital assets at 800% - “regardless of whether the positions are held in the banking or trading book.”

The high risk coverage for cryptoassets indicates that FINMA considers them to be highly volatile, and classifies their trading “at the same level as hedge fund activity.”

"Increasing Number Of Enquiries" From Cryptoasset Holders

Although the Swiss financial regulator acknowledges that cryptocurrency prices have stabilized in the last few months - with bitcoin’s (BTC) volatility index being at its lowest since December 2016, it still thinks that the “spectre of volatility stills hangs over the asset class.”

According to a confidential letter FINMA recently sent to EXPERTSuisse (an association for Switzerland’s accountants and trustees), the Swiss regulator has “received an increasing number of enquiries from banks and securities dealers holding positions in cryptoassets.”

In response, FINMA said that anyone who owns cryptoassets is “subject to capital adequacy requirements, risk distribution regulations and regulations for the calculation of short-term liquidity ratios.”

Must "Assume Value Of $50,000" Per Bitcoin

Bitcoin (BTC) is currently trading at around $6,400 according to data from CryptoCompare, however, a financial institution has to “assume a value of around $50,000” per bitcoin when determining the “risk-weighted” value of the cryptocurrency.

Because of this, banks and other financial service organizations must “put aside a larger chunk of capital to cover potential losses of cryptocurrency positions than most other assets,” local news outlet, SwissInfo.ch explained.

FINMA has also instructed Swiss financial institutions to limit their digital currency trading activity to 4% of their total capital. When this limit has been reached, the institutions must report to the nation’s regulatory authorities.

Positive Feedback From Switzerland Bitcoin Association

Notably, these guidelines are only applicable to cryptoassets that institutions are holding on their balance sheets, and do not apply to customer funds held separately.

Responding to the new crypto regulatory requirements, the Bitcoin Switzerland Association (an “active community” of crypto enthusiasts that aim to increase awareness of digital assets), said: 

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. This is the Swiss financial centre’s first step towards moving into the next decade where assets are no longer held in a single, central custody but instead are held on the blockchain.

Bitcoin Switzerland Association

 

Blockchain-Enabled Chinese Yuan Could Increase Governmental Oversight, Investor Argues

The Chinese government has been closely studying blockchain technology in order to determine whether the immutable distributed ledger can be used to streamline routine business processes.

However, Chinese authorities have expressed concerns regarding the use of cryptocurrencies in financing illicit activities and potentially disrupting the country’s $12 trillion economy by facilitating capital flight.

People’s Bank of China Considering Blockchain-Based Yuan

While China’s government has attempted to restrict transactions involving cryptocurrencies, the People’s Bank of China (PBoC) has reportedly been conducting research to determine the feasibility of launching a blockchain-based Chinese yuan (CNY) since 2014.

This, according to Dovey Wan, a founding partner at Primitive Ventures, a “market cycle agnostic” investment firm which has invested undisclosed amounts into various cryptoasset projects such as ZCash (ZEC) and DFINITY.

Wan, who earned her Masters in Information Systems from Carnegie Mellon University, wrote in a blog post published on CoinDesk on May 17, 2019 that the digital yuan, or Renminbi (RMB), initiative may potentially allow the Chinese government to exercise greater control over the nation’s local and international economy.

M0 Versus M2

As explained by Wan, digital fiat currencies allow financial institutions to more effectively create credit flows which increase M2, the broad money supply. Meanwhile, blockchain-based digital currencies impact a base currency measure, referred to as M0.

Blockchain-enabled digital currencies could potentially allow central banks to “bypass commercial banks” in order to directly control money creation and supply channels. This would structurally centralize the central financial institution’s power and role in formulating monetary policy, Wan argued.

Chinese Government Will Most Likely Use Permissioned Network

According to Wan, the PBoC is looking at various types of network design for a digital, blockchain-powered RMB. She believes that it will most likely be a permissioned network in which the nodes will be managed by major Chinese financial institutions, including the PBoC.

This indicates that transactions involving a digital yuan would only be seen by Chinese banks, and not the nation’s citizens.

Blockchain-Powered Currencies Enable “Better Coordination Paradigm”

One of the main reasons for using blockchain technology, Wan noted, is to take advantage of “a better coordination paradigm” when compared to “traditional currency supply management, which is heavily dependent on bookkeeping,” Wan wrote.

Moreover, Wan thinks blockchain’s immutable nature and private-key cryptography can prohibit users from entering fraudulent transactions and also prevent users from counterfeiting currency notes.

A blockchain-based yuan could also assist the Chinese government in more carefully monitoring the spending history of the nation's residents. This would allow the government to "accurately assess creditworthiness" and detect illegal activities such as money laundering and tax evasion, Wan noted.