Response: Flow Traders' response to Basel's crypto proposals and market impact

28 September 2022

Proportional approach of ‘Same activity, same risk, same treatment’ principle. The Basel Committee should re-assess their prudential treatment of crypto assets exposures. 

Recent crypto market dynamics signal to call for regulation to protect and support digital asset ecosystem players and increase transparency in the market. Going forward, the focus should be on the functioning of the market and rebuilding trust. The Basel Committee’s second consultation on their proposed prudential treatment of crypto assets exposures is part of that road to mature crypto markets but also includes far reaching measures with devastating consequences for innovations in capital markets and the benefits of digitalization. In our response to the consultation, we make several recommendations to reverse these consequences. We strongly believe the 1% Tier 1 exposure limit and the 100% capital charge would discourage all market participants to develop a mature, regulated digital asset ecosystem. It would be better to identify the different functions and characteristics of crypto assets and based on that subdivision align them with existing regulations.

“Market participants, regulators and legislators should focus on enabling, participating and fostering the innovative and groundbreaking developments the digital asset ecosystem brings, because there is a large societal benefit for many connected to these new technologies, such as self-determination of means of payment, financial inclusion and wealth building, direct international transfer of assets and participating in economic development in regions and worldwide through investments.” says Niels Lemmers, Head of Public Affairs Flow Traders 

In this comment letter we highlight our main observations and concerns and present our recommendations. Generally, we believe an iterative approach to develop the framework is important to account for the pace at which the crypto asset markets and the technologies evolve.

We are convinced that applying the general principle ‘Same risk, same activity, same treatment’ in a proportional sense, is essential in designing a balanced prudential treatment for cryptoassets exposures. As a principle, Flow Traders believes that where there is an equivalent exposure or function, digital assets should be treated the same as their non-digital equivalents. This holds for market regulation as well as prudential regulation. Above all, applying the currently proposed prudential approach to cryptoassets will lead to overly onerous capital requirements pushing the services and activities relating to cryptoassets - including the opportunities for innovation - away from the regulated financial industry into unregulated entities and sectors. Notwithstanding the consultation’s apparent stance that the industry around cryptoassets should be curbed, such an innovative, forward-looking societal trend cannot be meant to be completely unregulated and away from lit markets.

Please read our full response here.