FINMA, the Swiss financial market supervisory authority, is said to have assigned a flat risk weight of 800% to cryptoassets. According to several news reports this information is included in a letter sent on October 15 to EXPERTsuisse, an association for audit, tax, and fiduciary professionals. The letter states that “FINMA has recently received an increasing number of enquiries from banks and securities dealers holding positions in cryptoassets and subject to capital adequacy requirements, risk distribution regulations and regulations for the calculation of short-term liquidity ratios”. According to the reports the 800% risk weight applies to cryptoassets both in the banking and the trading book.
What does this mean?
A risk-weight of 800% means that for purposes of calculating capital requirements the market value of cryptoassets is multiplied 8 times. The bank has to support 8% of this risk-weight with capital, i.e. 64 cents for each franc of market value. Under the Basle III bank capital framework risk-weights are somewhere between 0% for highly-rated sovereign debt and 150% for non-investment grade corporate debt, high-volatility real estate or past due exposures. Secured real-estate credit carries a risk-weight of 35%. The highest risk weight under the current regime is 1,250% for positive replacement values from failed derivatives and securities transactions or payments. The 800% risk weight considered by FINMA therefore is clearly on the high end.
Expectation for the future
Taking into account the rationale for the calibration of risk weights under the Basle III capital framework it is clear that it is the extreme volatility of cryptocurrency that warrants such a high risk weight. On the other hand is seems equally clear that this rationale is valid only for cryptocurrencies that have no intrinsic value and do not represent any sort of claim against an issuer, but not for crypto-assets in general. If the Federal Finance Department one day would decide to issue public debt (“Eidgenossen”) in tokenized form, the risk weight of this token would be 0%. We would therefore expect that for most security tokens and adequate risk weight would be somewhere between 100 and 250%.
Cryptoassets in the banking system
Another point is important. The fact that auditors requested advice from FINMA on how to calculate the capital charge for cryptoassets is another clear sign that this new asset class is quickly making inroads into the banking system.
Contributing Advisors
