Why the banks won’t touch bitcoin anytime soon

The Basel committee acknowledged that crypto market is now “meaningful,” but it also fears these new assets could harm financial stability. Why?

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One of their biggest concerns is the ability to be anonymous when using bitcoin, which raises the obvious risk of facilitating money laundering.

As shown by the $1.3 billion fine copped by Westpac and the $700 million paid by Commonwealth Bank, both for anti-money laundering breaches, breaking these laws is extremely costly.

To a risk-averse Australian bank, that is mainly focused on selling mortgages rather than racy financial market trends, risking a fine of that magnitude isn’t worth the clip of the ticket from facilitating crypto trading.

Other risks for banks include consumer protection (cryptocurrencies are popular with scammers and fraudsters) and the massive carbon footprint of bitcoin. As a result, the Basel committee proposed banks use extremely conservative “risk weights” – financial models for determining the riskiness of assets – when they are exposed to crypto assets. To protect bank depositors, it suggested banks hold a dollar of capital for every dollar in bitcoin.

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Lance Blockley, managing director of payments consultancy The Initiatives Group, says the risk weights proposed by Basel suggest regulators want to safeguard banks for the possibility that many cryptocurrency assets might become near worthless. If the weightings proposed were put into action, he says banks would be extremely unlikely to hold crypto assets as security.

This tough stance is only the latest sign regulators are turning up the pressure on cryptocurrencies – another is that the Australian Tax Office will be scouring tax returns for undeclared crypto capital gains this year.

This caution extends to many banks not wanting to deal with cryptocurrency exchanges as clients. Such is the banks’ conservatism that an inquiry chaired by Liberal Senator Andrew Bragg is probing claims of “de-banking,” where fintech firms are dumped by banks as clients, often over risk or regulatory concerns.

But is the banks’ caution really such a problem?

In their defence, bankers say the risks surrounding cryptocurrencies are simply too large, and the rules too ill-defined, for them to want to get more involved in the sector. They are not completely absent from the digital money debate, either. It’s worth noting that CBA, National Australia Bank and Perpetual are also working with the Reserve Bank on another experimental form of money, through a project on digital wholesale bank notes.

Andrew Bragg: “The policy issues which are driving instances of debanking are for Canberra to solve.”Credit:Dominic Lorrimer

All the same, banks being highly risk-averse can also create costs. One risk being explored by Bragg is that Australian start-ups in this area will head overseas if the country’s biggest financial institutions and regulators don’t have a clear framework for dealing with crypto assets.

Another risk is the local sector misses out on important innovations. Managing director of the Australian arm of crypto exchange Kraken, Jonathon Miller, says there’s been a lack of major bank investment in the crypto sector through their venture capital arms – with the exception of Westpac’s lucrative investment in US firm Coinbase. “I think banks have put themselves at arm’s length from innovation by doing that,” Miller says.

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Miller says scepticism towards cryptocurrencies is fine, as some are indeed experimental and we don’t know how useful they will end up being. But he says it’s too simplistic to characterise the entire field of crypto assets as speculative – and some money managers agree certain cryptos are becoming a more mainstream asset class.

For the moment, however, bankers are likely to continue watching the wild ride in cryptocurrencies from the sidelines.

Ross Gittins is on leave.

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