Swiss Regulator FINMA Wants to Classify Crypto In High Risk Category

Although Switzerland is one of the most-preferred destinations for crypto firms and businesses, its regulatory watchdog Financial Market Supervisory Authority (FINMA) has strict instructions for its local banking institutions.

FINMA wants banks, dealing with crypto assets, to apply high-risk weightage on crypt-related activities. Citing a letter source to EXPERTsuisse, local new publication swissinfo,ch reveals how FINMA wants financial institutions to weigh crypto assets while simultaneously calculating the loss-absorbing capital buffers.

Currently, the regulatory watchdog FINMA has received multiple inquiries from banks and security dealers who are currently holding positions in crypto assets. The letter notes that these institutes are subjected to risk distribution regulations, capital adequacy requirements, as well as regulations for the calculation of short-term liquidity ratios.

FINMA is now advising financial banking institutions that the digital currency assets should be “assigned a flat risk weight of 800% to cover market and credit risks, regardless of whether the positions are held in the banking or trading book”.

Assigning 800% weightage to the crypto assets shows that FINMA considers them to be highly speculation driven and volatile investment tools. Hence the risks offered by crypto asset trading is similar to that of the hedge-fund activity.

So now that Bitcoin is currently trading at $6000, according to 800% risk-weightage, the banks must assume the value of $50000 for each Bitcoin token. Hence it needs to have a huge amount of capital kept aside to cover potential losses in crypto positions in comparison to other assets.

FINMA suggest that banks must put a cap of 4% of the total capital on crypto trading activities. This also includes for the long and short positions on the crypto assets. Furthermore, FINMA insists that banking institutions should report immediately when they have reached the total limit.

Moreover, based on the liquidity ratios, the regulators shouldn’t consider crypto assets as highly liquid assets. Furthermore, FINMA notes that its guidelines are also applicable to crypto banks like SEBA which are currently set up in Switzerland.

SEBA has currently applied for a license to bring full banking services for crypto assets just like the traditional currencies. In a word with swissinfo.ch, SEBA CEO Guido Bühler said: “SEBA acknowledges the guidelines which may be justified for certain models on how crypto assets are handled and held. We believe that the guidelines have a limited impact on SEBA's business model”.