Basel banking proposals on ‘crypto’ assets spell bad news for BTC bag holders—part 2

Sept 18,2022
Basel banking proposals on ‘crypto’ assets spell bad news for BTC bag holders—part 2

This is a three part editorial series. Look up part 1 and Part 3 here.

After the international financial crisis in 2008, the Lisbon banking supervision Federation (BCBS) drafted rules and regulations, and then authorized financial institutions around the world to implement them, so as to protect the financial system and people from the impact of the worst economic situation since the great depression. The systematic threat of the financial crisis to the United States and the subsequent world economy, coupled with many (now some former) key financial institutions and unscrupulous exploration personal behaviors, has been quickly controlled, although it is still too late. With the socio-economic development of "encrypted" assets, the Basel Accord attempts to eliminate the probability of similar events before operation.

"The Federation feels that the growth of crypto assets and service content may cause financial stability worries and increase the risks faced by financial institutions," BCB explained at the beginning of the public consultation session on the development trend of crypto asset risk control in 2021.

"Some crypto assets show a high degree of uncertainty. With the improvement of risk openness, they may pose risks to banks, including liquidity risk, personal credit risk, sales market risk, practical operation risk (including fraud and Internet risk), money laundering / terrorist financing risk, and legal and reputation risk."

In order to mitigate the risk of this feeling, the Basel Accord provides a set of comprehensive policies and regulations for those who want to obtain a risk open bank and provide digital currency commodity banks to users. This proposal gradually began with the discussion document in 2019, followed by the public consultation document in 2021, and now is the public consultation document in 2022. This is likely to be the last opportunity to make any changes. Since the Federation has indicated that it is ready to negotiate and prepare in advance for the approval of such policies and regulations by the end of this year.

Since the first discussion document was released in 2019, Lisbon's basic position has been basically the same, adopting a risk avoidance approach and viewing most of the data asset ecosystem with great skepticism. Although a very few people in the field of "encryption" shout, and the cry is much louder than the cry, so far, the public's capital investment has only caused further restrictions and stricter standards, especially around assets without real value figures such as BTC.

The key to the proposal put forward by the Basel Accord is to create a two-group classification system for crypto assets. The platform clarifies how financial institutions deal with such assets according to the classification method of crypto assets, and limits the number of assets that can be owned on the balance sheet. It also tightens the important liquidity risk reserves around such assets and has the required risk mitigation elements.

It is an asset that belongs to the classification of group 1 crypto assets and meets the strict management of any one of the two subgroups (through some changes) and is eligible for repair within the original Lisbon framework. At the same time, it also brings a clearer and more familiar way for financial institutions to participate in it. Under the default setting, all crypto assets that fail to meet the classification requirements of the first group are also classified into the second group of crypto assets. In this case, crypto assets have a set of stricter rules and requirements, requiring financial institutions to treat them.

The proposed regulatory requirements have a clear and detailed framework that defines whether to screen data assets. For BTC package holders, this proposal will not be very popular, because we hope that banks will recover a lot of foreign exchange speculative assets to recall the retro sentiment of the last bull market and the subsequent absurd prices.

Group 1 crypto assets

The Federation has determined that group 1 crypto assets with relatively low risk compared with group 2 counterparts are divided into a pair of narrow subgroups within the framework of group 2: Group 1A assets can be described as tokenized traditional assets, and group 1b assets can be classified as stable coins through an efficient and stable way. Will be classified as group 1 crypto assets, and all the category conditions defined as group 1A or 1b crypto assets must be met in a thorough part of the compliance management score. If it is zero, it is all or part of the transaction.

Interestingly, the Federation emphasizes in particular that crypto assets supported by unapproved blockchain technologies include most (if not all) public blockchain technologies (although some people believe that the concentration characteristics of developers such as BTC and Ethereum in manipulating blockchain technologies are not unapproved in fact), and it is unlikely to reach the classification basis of group 1 crypto assets under any subgroup. However, as part of the whole process of public consultation, Lisbon is especially looking for feedback in this field, which means that if appropriate inclusion standards can be formulated, changes may occur in the future.

In addition, the revised 2022 proposal includes the "added value of infrastructure construction risk" of 2.5% for each recognized group 1 crypto asset, so as to include all the additional risks arising from the occurrence of blockchain technology and distributed ledger technology. This risk is likely to have unexpected and unexplained risks.

Group 1A crypto assets are only composed of tokenized traditional assets, which use blockchain applications as a record ownership replacement method (in reverse to centralized securities bank depository or fund custodian). In fact, this will include bonds, loans, savings and stocks; Products; And the cash in its deposits, each of which is subject to conditionality, including the operability of strict laws and regulations and the predictability of no restrictions or transfer liquidation at any time. They must also grant all legal rights to the underlying assets without conversion, such as cash flow rights or bankruptcy claims. Crypto assets that must be redeemed or converted into traditional assets to benefit from this legal right do not match the true identity of group 1A crypto assets.

Assets that reach this standardization will be subject to at least the same asset standards, which means that the minimum level required is undoubtedly the standard included in the current Lisbon asset structure to protect the industry and operational risks of basic assets. In fact, it has brought basically the same benefits and properties to financial institutions. As far as the Basel Accord is concerned, it is like its traditional equivalents are owned.

Perhaps most importantly, group 1A crypto assets are the only crypto assets eligible to be identified as risk mitigation collateral within the proposed framework. This means that only group 1A crypto assets may be included when financial institutions measure their personal credit risk openness and the following standards to mitigate this risk according to the current Lisbon framework (and its basis definition, applicable domestic laws and public international laws that choose this principle). This kind of assets must still conform to the market depth and liquidity provisions, and be very different from traditional assets, so as to adapt to the provisions of the proposal and reasonably ensure that its entire use value can be redeemed at any time in the event of a settlement accident.

Group 1b crypto assets are only composed of so-called stable coins, which are defined as crypto assets with a "reasonable stable system". According to the proposal, it will be classified as a stable coin with a reasonable and stable way, and crypto assets must meet two tests: redemption risk test and basic risk test.

The purpose of the redemption risk test is to ensure that the reserve assets are sufficient so that the assets can be redeemed at any time, including (although according to recent events, it is likely to be "especially" more suitable) the value of the linked use during the extreme work pressure period. This means that in order to meet the needs of testing, a relatively stable foreign coin must be convertible into a foreign currency at any time. This test has additional requirements for the composition and value of the reserve assets supporting stable coins, but the key to the test is that they must be redeemable at any time.

Basically, the purpose of the risk test is to ensure that crypto assets can be sold in the market at the amount of "closely tracking the linked use value". This test is more complicated, including three "sub tests". They determine whether crypto assets are tested and how to screen them within the proposed framework. The proposal emphasizes:

Test 1: if the difference in the fixed value cannot exceed 10 basis points more than 3 times in the past 12 months, the crypto assets have been "thoroughly tested according to" the standard risk.

Test 2: if the total market value difference of the linked assets exceeds 20 basis points more than 10 times in the past 12 months, the crypto assets "fail" the standard risk test.

Test 3: if the crypto assets have neither "thorough basis" nor "fail" the basic risk test, it is called "improvised basis" for the basic risk test. Crypto assets that meet all the classification criteria listed in group 1b but only make do with the basic risk test will be added to the risk weight calculation assets.

In essence, in order to realize the demand for basically risk-free rest (as a thorough pass card) and be classified as the first group of crypto assets, the market price of stable coins cannot fluctuate more than 0.1% or even more than 3 times in 12 months. Coins that have not reached this high water level but have not fluctuated by more than 0.2% for more than 10 times in the past 12 months are said to have passed the test, but additional regulations need to be followed before they can be owned under the category of group 1b.

This is obviously different from the first consultation document published in Lisbon in 2019. At the beginning of the document, a quantitative analysis test was given, which stipulated that banks should monitor the difference between the industrial value of stable currency and the use value of linked currency.

The fallacy of the so-called "stable" coin

If the analysis method of group 1 crypto assets and the required type test are implemented, because it is expected to a certain extent, then the probability that the most popular stable coins used at this stage will be owned by key financial institutions is virtually zero.

Take tether (usdt) as an example. It is a "stable" coin. At the time of writing this article, it has the third largest total market value among all digital assets. Because of the ridiculous "financial audit" carried out on the reserve assets of its supporting coin, it has long been subject to strict verification by the government (including the office of the Attorney General of New York State in the United States). Even the most famous members of the crypto criminal cartel will recognize it, No reason can satisfy the Lisbon proposal. However, even if we temporarily suspend our firm belief and pretend that tether's financial audit is completely magnanimous, its reserve assets form assets that meet the redemption risk test, and the "stable" loan currency can not maintain its exchange rate pegged to the US dollar at all. In May, the rate plummeted 545 basis points to US $0.9455, This will make it difficult to be included in the balance sheets of all commercial banks (although it is difficult to imagine that all financial institutions with good reputation will consider applying tether, even if there is no explicit prohibition rule).

Similarly, in the past week alone, each of the top five stable loan currencies in terms of market value, such as US gold coins (usdc), binance dollars (busd), Dai (DAI) and trueusd (tusd), failed to maintain an appropriate linkage according to the requirements of the proposed premise risk test. Even before considering the composition of reserve assets under the redemption risk test, they were downgraded to group 2 crypto assets.

However, although the so-called "stable" coins of this generation at this stage have systematic risks for customer organizations and individuals, and they are at most dark mortgages, this does not prevent members of the crypto criminal cartel from doing things purely for their personal interests and trying to twist the story for their personal interests.

In order to reply to the original proposal document or the inquiry suggestion in June last year, BTC Research Association of Germany and Switzerland (not confused with BTC Research Association of BSV) was very happy to praise tether's advantages (it is likely that she benefited from this again because he showed his efficacy in keeping the price of BTC Ponzi scheme by human factors).

"The first group of norms with a 10 basis point change is too restrictive, which is also an incorrect evaluation indicator. To take a practical example: stable coins like tether (usdt) have very good opportunities to be called group 1 crypto assets. Because of its high liquidity, the difference between it and US dollar trading is not large," they wrote.

"However, in addition, the risk of the regulatory authorities freezing the accounts of foreign investors in the name of severely cracking down on money laundering cannot be ignored, which may lead to a sudden decline in the total market value of the tether."


However, it is a pity that for tether advocates, the unchallenged echo chamber they are used to operating in, and the obvious lack of direct evidence to verify their fabricated claims, are not tenable among the senior energy participants of the previous financial system.

"In order to ensure a fair transaction, the French commercial bank commission stated in its documents that" for non bank publicly issued stable loan coins, such as tether, it is reported that only 100% of its stable loan coins are guaranteed by loans in US dollars or other currencies in circulation, or its loan guarantees are not completely transparent, which should be strictly regarded as the corresponding sales or structure of commercial banks. ".

"Because tether is a key liquidity service provider in the BTC market, although the relatively stable owner of tether coins needs to be" guaranteed by loans "of commercial acceptance bills, attention should also be paid to the reliability and liquidity risks of the financial industry. Therefore, the control and distribution should pay attention to the specific pledge of stable coins as much as possible, and the consideration of asset standards should lie in the types of stable coins considered. "

Naturally, in the law-abiding BSV ecosystem, the expectation that the stable coin is 100% applicable to its assets as a data broker has long been established. In 2019, Jimmy Nguyen, the founder and current chairman of BTC research society, wrote a column for coingeek, describing in detail the friendly principles and integrity commitments applicable to BSV regulation:

"If you sell stable currency (on BSV or other websites), the applicable assets should be verifiable and auditable, so as to ensure that every stable currency in the meaning of US dollars is really supported by real assets or liquidity assets equivalent to US dollars," Ruan said.

"Many observers feel that tether coin is used to artificially boost BTC's value, which is included in BTC's crazy 2017 bull market period and endangers BTC's sales market too much. On the contrary, it has triggered other cryptocurrencies to fall and rise due to human factors. This ancient history is closely linked with BTC's price trend. We don't want the wonderfully forged digital coin to distort the financial system."

Therefore, although all the ideas related to group 1 cryptoassets put forward by Lisbon do not obviously deviate from the ideal of all responsible blockchain ecosystems and digital currencies, the reflection of this recommendation in some corners of the data asset industry shows that there is still a lot of work to be done to clear this field.

It is worth noting that Lisbon has not obtained key results on how the central bank's digital currency (CBDC) is classified. They said that this issue will be further considered in the sale. However, from the word by word, it seems that CBDC with moderate manipulation and efficient customization may be implemented in the future, and more favorable accounting standards will be implemented for banks, which is more similar to the current treatment of cash and risk reserve accounts. According to the current proposed structure, this will effectively monopolize the sales market of financial institutions.

However, given that the Lisbon proposal is already very strict on the preconditions for the increase of group 1 crypto assets, why are dishonest corners in the crypto world clamoring to release pressure and classify "assets" such as tether? In the final part of the series, we will discuss all other crypto assets in group 2 and describe in detail why this is bad news for BTC package holders who want banks to promote price increases.

Read the first part of this three part series, "the proposal of Lisbon financial institutions on crypto assets represents bad news for BTC package holders".