In a position paper, the Swiss Blockchain Federation, a multi-stakeholder action group, warns against the planned implementation of the Basel Standards for the regulatory treatment of crypto-assets in Switzerland. They call the implementation a fundamental strategic shift for the Crypto Valley.
The Basel Committee on Banking Supervision (BCBS) is an international regulatory organization founded in 1974 to strengthen the stability of the global banking system by establishing standards and guidelines. The Committee is best known for its Basel Accords, which include a series of international banking regulations on capital adequacy, stress testing, and market liquidity risk.
Switzerland is one of the founding members of the Basel Committee and has committed itself to adopting its standards as comprehensively as possible. In 2022, the BCBS released a new standard for the regulatory treatment of crypto-based assets held by banks. This is to be implemented in Switzerland through a partial revision of the Capital Adequacy Ordinance. The Swiss Blockchain Federation (SBF) is ringing the alarm.
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Disproportionate capital requirements
The Basel crypto standard, finalized at the end of 2022, specifies the capital requirements banks must meet to cover market, counterparty, and credit risks associated with crypto assets. Key elements include a risk weight of 1,250% for crypto assets and an absolute cap on crypto risks of 1% (but in no case more than 2%) of a bank's Tier 1 capital. From the risk weight of 1,250% - the highest in the Basel capital requirements - capital requirements of 130 to 200% of the book value of the underlying crypto assets are calculated, taking into account capital buffers.
In contrast, the Swiss Financial Market Supervisory Authority (FINMA) currently demands capital equivalent to the maximum loss risk with a risk weight of 800%. The cap of 4% of total capital, which is applied according to the practice of financial market supervision, is significantly less stringent. The regulatory working group of the Swiss Blockchain Federation has intensively analyzed the Basel crypto standard. The capital requirements it proposes are disproportionate to the real risks associated with banks holding crypto assets, according to a press release. The Swiss Blockchain Federation specifically criticizes:
- Lack of technology-neutral regulation: The prohibitive capital requirements of the Basel crypto standard would penalize the use of a specific technology and are therefore not compatible with the principle of technology-neutral regulation (same business, same risks, same rules).
- Indiscriminate: The Basel crypto standard lumps together crypto assets with very different risk profiles (cryptocurrencies, stablecoins, tokenized financial assets, etc.) under a one-size-fits-all approach. This violates the principle of equality under the law.
- Disproportionate: Capital requirements of up to 200% of the maximum loss risk are disproportionate and not covered by the legal basis. According to these, capital requirements should be "determined by the nature of the business activity and the risks involved."
- Incompatible with Swiss Blockchain Strategy: Currently, about 30 banks are involved in the crypto business in Switzerland, including two specialized crypto banks. The proposals of the Basel Committee would effectively create a firewall between the banking system and the crypto industry, which is incompatible with the blockchain strategy Switzerland has pursued so far.
The adoption of the Basel crypto standard would represent a fundamental strategic shift, contradicting the stance of the Parliament, which unanimously approved the DLT law in 2021, clearly advocating for a forward-looking blockchain and crypto location in Switzerland.
Good success rate
Recently, the Swiss Blockchain Federation (SBF) along with the Crypto Valley Association (CVA) opposed the new staking practices of the Swiss Financial Market Supervisory Authority (FINMA), as reported by CVJ.CH. Under the revised regulations, service providers would have required a banking license. Just a few months after strong industry criticism, FINMA revised its position. Now, the SBF aims to achieve another victory for the industry. The full adoption of the Basel crypto standard is deemed neither politically nor legally defensible.
Instead, the group proposes the development of national regulation. This regulation must be based on real risks and respect the interests of Switzerland. The SBF stands ready to constructively contribute to this process and provide its expertise to support the development of a regulatory framework that strengthens Switzerland as a financial and blockchain hub while ensuring the integrity of the financial system. The Swiss Blockchain Federation has a strong political base, with around 80 members, including the cantons of Ticino, Zug, Neuchâtel, and Zürich.
"It is overall incomprehensible how, based on a sober risk analysis, regulatory requirements that apply solely because of the use of a certain technology for entirely different types of crypto assets can be justified. Even less understandable is how capital requirements, which far exceed the maximum loss risk, can be justified. Also, from a risk perspective, no justification can be found for the very strict caps on crypto assets." - Position paper Swiss Blockchain Federation
