Strict Guidelines to Banks regarding Crypto Trade by Swiss FINMA

By Chetna Phour

According to a recent report, the Financial Market Supervisory Authority (FINMA) of Switzerland issued a confidential letter to banks and other financial institutions regarding digital assets.

In the letter, FINMA advised the financial institutions to follow tough guidelines if they want to trade in cryptocurrencies. According to FINMA, cryptocurrencies such as Bitcoin should be risk-weighted at 800% of their current market value at the time when financial institutions calculate loss-absorbing capital buffers. Swiss FINMA said that it advised the financial institutions to assign a “flat risk weight of 800% to cover market and credit risk” against cryptocurrencies. It means if Bitcoin is currently trading at $7,000 then the financial institutions should value each Bitcoin at $56,000 on their books when deciding on an adequate level of the buffer.

The 800% weighted risk suggestion indicates that the Swiss FINMA considers cryptocurrencies as a volatile asset class. The step taken by FINMA puts the digital assets at the same level as hedge fund activity. Though currently most of the cryptocurrencies are trading in a narrow range but anytime there can be a massive fluctuation in the price of cryptocurrencies.

In the letter, FINMA also suggested that other countries should also take more stringent steps with the risk weighting digital assets. FINMA also put a cap of 4% on the cryptocurrency trading activities when adding long and short positions. The regulator insisted that the financial institutions must report the agency once they reached the limit. According to FINMA, cryptocurrencies cannot be considered as liquid assets that is why the banks should keep cash or easily convertible capital to cover short-term losses.

Other than traditional banks, there is a growing number of crypto banks who are looking for to get the license to operate full banking services to bridge the gap between crypto and traditional currency. SEBA Bank is looking for a similar licence. The Chief Executive Officer of SEBA Bank, Guido Buhler said that

“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.”

In February this year, after receiving numerous enquiries on Initial Coin Offerings (ICOs), FINMA also issued official guidelines for ICOs. The regulators said that it regards ICO tokens as securities which mean there is a requirement of securities and civil law for the trading of ICO tokens.