Banks to disclose cryptocurrency holdings amid 2023 bank failures

International regulators propose new transparency measures for banks’ crypto asset exposures, following a tumultuous year marked by banking disruptions linked to digital currencies.

With the sudden growth and popularity of cryptocurrencies like Bitcoin (BTC) and Ether (ETH), international regulators are now turning their attention towards the disclosure of these assets by banks, in a bid to maintain financial stability.

The Basel Committee on Banking Supervision, an influential body that defines norms for traditional financial institutions, has already made its stance clear: banks should maintain potentially hefty capital against their holdings of cryptocurrencies that lack intrinsic backing.

Their recommendations come in the wake of a tumultuous year for the crypto industry, underscored by the downfall of crypto exchange FTX and digital-centric banks like Signature and Silicon Valley Banks. The committee’s concern stems from a desire to prevent widespread financial disturbances – or “contagion” – arising from sudden shocks in the crypto sphere.

In an upcoming consultation paper, the Basel Committee will further delve into this subject, suggesting specific “disclosure requirements related to banks’ crypto asset exposures.” This is in addition to the digital asset capital requirements they finalized in December.

It’s noteworthy that while the Basel Committee – a conglomerate of bank supervisors from 28 jurisdictions, including powerhouses like the U.S., U.K., and European Union – had always maintained its stance of monitoring and adjusting crypto norms as needed, this is its first overt indication towards separate disclosure norms.

In a revelatory report released on Thursday, the committee didn’t mince words, equating the current challenges posed by cryptocurrencies to the “most significant system-wide banking stress” experienced since the 2008 financial meltdown. Interestingly, the sudden surge in crypto’s appeal was identified as a primary factor, amongst others, indirectly contributing to the upheavals in the traditional finance sector in March.

For instance, the report indicated that New York-based Signature Bank, which closed its operations on March 12, gravely underestimated the risks accompanying its ties to crypto industry deposits. Its leadership seemingly failed to foresee how anxieties over crypto volatility could prompt even their traditional clients to pull out funds.