Tiina Lee, CEO of Citi UK, criticized Basel Committee's new regulation imposing a 1,250% risk weight on crypto assets.
1,250% Risk Weight: A Stumbling Block for Banks
At a London event, Tiina Lee warned about the implications of the 1,250% crypto risk weight that requires banks to set aside £125 for every £100 in crypto holdings. She stated, 'If we push it into the unregulated area, we may lose the ability to properly supervise and control risks associated with cryptocurrencies. That can lead to more financial instability and consumer harm.'
New Compliance Burdens May Shift Activities Offshore
Financial institutions may reduce their crypto holdings, impacting the broader market. This regulation could drive crypto activities towards under-regulated or offshore entities, altering market dynamics. The 1,250% risk weight rule forces banks to prioritize risk-averse strategies, potentially cooling institutional engagement in crypto.
Historical Parallels: Regulatory Pressures Releasing Assets
Historically, such regulatory tactics have pushed assets into less regulated markets. Similar to the previous experiences with subprime exposures, heavy capital requirements on volatile assets could lead to reduced institutional engagement and a shift towards more flexible regulatory environments.
Tiina Lee's critique of the proposed risk weight highlights the potential shifts in crypto market dynamics and the need for careful contemplation of the implications for financial institutions.
