Rethinking Bitcoin Risk Weighting in Banking
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Reevaluating Bitcoin’s Capital Charges in Banking
Phong Le, the CEO of Strategy, has initiated a call for a comprehensive review of how banks are required to handle bitcoin exposure under Basel-style regulations. He argues that the current risk-weighting system significantly influences whether regulated institutions can engage with digital assets like bitcoin.
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The Impact of Capital Penalties on Bitcoin
According to Le, the issue is a structural one rather than political, deeply rooted in how global capital regulations shape national banking policies. “The Basel Accords establish global bank capital standards and risk-weighting rules for assets, which are critical in determining how banks interact with digital assets, including bitcoin,” Le explained. “These standards are created by the Basel Committee, consisting of central banks and regulators from 28 different jurisdictions, including the US.”
Le connected this to the US’s aspirations to lead in the crypto field, stating, “If the US aims to become the Crypto Capital of the World, we need to reevaluate our implementation of Basel capital treatment.”
Understanding the Risk Weights
Jeff Walton, who shared the chart referenced by Le, highlighted stark differences in risk weights across asset classes: “Basel III Risk weights assign 0% to Gold, 300% to Public Equity, and a staggering 1,250% to Bitcoin.” Walton emphasized that for the US to position itself as a “crypto capital,” banking regulations must evolve because “risk is currently mispriced.”
The chart illustrates a hierarchy of “typical” risk weights for various asset classes. Cash and central bank reserves are at 0%, similar to physical gold and sovereign debt like US Treasuries. Investment-grade corporate debt ranges from 20% to 75%, unrated corporate debt is at 100%, high-yield at 150%, public equity at 250–300%, and private equity exceeds 400%. Notably, Bitcoin is distinctly positioned at 1,250%.
The Challenges of High Risk Weights for Bitcoin
Conner Brown, Head of Strategy at the Bitcoin Policy Institute, contends that such risk weighting renders bank intermediation of bitcoin uneconomical. “It’s difficult to overstate the policy misstep this represents,” Brown remarked. “Banks must allocate capital based on perceived asset risk. Higher ‘risk weights’ make holding an asset costlier for banks.”
Brown noted that the 1,250% risk weight implies a direct capital requirement equal to the bitcoin exposure. He elaborated, “This means banks must reserve $1 in capital for every $1 of Bitcoin exposure, whereas gold incurs virtually no capital cost, akin to cash.”
He challenged the notion that bitcoin should face harsher penalties compared to traditional assets, arguing that its unique attributes—such as continuous trading, easy auditability, fixed supply, rapid settlement, and transparent pricing—offer advantages for risk management and market functionality. Consequently, regulators effectively deter banks from providing custody and related services that businesses and individuals might prefer under regulated frameworks.
Broader Implications and Competitiveness
Brown emphasized that the repercussions extend beyond bank balance sheets, affecting global competitiveness. He argued that this framework redirects activities to “non-bank entities and offshore jurisdictions,” which he believes are riskier. Failing to adapt the regulatory approach could potentially disadvantage US institutions on a global scale.
As of the latest update, Bitcoin is valued at $67,857.
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