Swiss Financial Watchdog Recommends Banks Set Crypto Risk Coverage at 800%
The Swiss Financial Market Supervisory Authority FINMA has advised banks and other financial institutions to estimate risk coverage for cryptocurrencies at 800 percent of current market value, Cointelegraph auf Deutsch reports today, Nov. 5.
Major local news portal Swissinfo reportedly saw a copy of a confidential letter from FINMA to the Swiss Association for Audit, Tax and Fiduciary (EXPERTsuisse), which explains the watchdog agency’s stance on capital buffers for crypto assets.
In the letter, FINMA recommends financial service providers to allocate a flat risk weight of 800 percent for “to cover market and credit risks, regardless of whether the positions are held in the banking or trading book.”
Bitcoin (BTC) is currently trading at $ 6,402, meaning that when calculating the risk weight of assets, a bank must assume a value of over $51,000 per Bitcoin. Under the new advisement, banks would set aside massive amounts of capital in order to cover potential losses on cryptocurrency positions.
As Swissinfo reports, a risk weight of 800 percent is at the upper end of the range for financial assets, which suggests that FINMA views the investment as very volatile. Crypto asset trading is valued by FINMA in a similar fashion to hedge fund activity, despite the sharp drop in crypto prices and subsequent price stability this year.
The regulator also sets a cap on crypto trading at four percent of total capital after offsetting all long and short positions. FINMA insists that institutions report when they reach that limit.
FINMA also stipulates that cryptocurrencies cannot be considered highly liquid financial assets when determining liquidity ratios i.e. capital that banks can use to offset short-term losses.
According to Swissinfo, these standards for handling cryptocurrencies, which FINMA has apparently communicated to banks, will apply until the next meeting of the Basel Committee on Banking Supervision from Nov. 26–27.
At the beginning of October, FINMA awarded the country’s first crypto asset management license to a crypto investment fund. With the new license Crypto Fund will be able to legally offer a wide spectrum of collective investment products that track Bitcoin and other crypto assets, including domestic funds.