Finma: Crypto trading as risky as hedge funds

The Swiss Financial Market Supervisory Authority FINMA has advised banks and other financial institutions to estimate risk coverage for cryptocurrencies at 800 percent of current market value, Cointelegraph auf Deutsch reports on Monday.

Major local news portal Swissinfo reportedly saw a copy of a confidential letter from FINMA to the Swiss Association for Audit, Tax and Fiduciary (EXPERTsuisse), which explains the watchdog agency’s stance on capital buffers for crypto assets.

FINMA also advised local banks and other financial institutions to estimate risk coverage for all digital assets at 800% – “regardless of whether the positions are held in the banking or trading book.”

The high risk coverage for cryptoassets indicates that FINMA considers them to be highly volatile, and classifies their trading “at the same level as hedge fund activity.”

Bitcoin (BTC) is currently trading at $ 6,402, meaning that when calculating the risk weight of assets, a bank must assume a value of over $51,000 per Bitcoin. Under the new advisement, banks would set aside massive amounts of capital in order to cover potential losses on cryptocurrency positions.

As Swissinfo reports, a risk weight of 800 percent is at the upper end of the range for financial assets, which suggests that FINMA views the investment as very volatile. Crypto asset trading is valued by FINMA in a similar fashion to hedge fund activity, despite the sharp drop in crypto prices and subsequent price stability this year.

Because of this, banks and other financial service organizations must “put aside a larger chunk of capital to cover potential losses of cryptocurrency positions than most other assets,” local news outlet, explained.

FINMA has also instructed Swiss financial institutions to limit their digital currency trading activity to 4% of their total capital. When this limit has been reached, the institutions must report to the nation’s regulatory authorities.

According to Swissinfo, these standards for handling cryptocurrencies, which FINMA has apparently communicated to banks, will apply until the next meeting of the Basel Committee on Banking Supervision from Nov. 26–27.

At the beginning of October, FINMA awarded the country’s first crypto asset management license to a crypto investment fund. With the new license Crypto Fund will be able to legally offer a wide spectrum of collective investment products that track Bitcoin and other crypto assets, including domestic funds.

Responding to the new crypto regulatory requirements, the Bitcoin Switzerland Association (an “active community” of crypto enthusiasts that aim to increase awareness of digital assets), said: It’s encouraging to see banks no longer turning down the increasing number of client requests for crypto services but asking for guidance and providing their input along the way. This is the Swiss financial centre’s first step towards moving into the next decade where assets are no longer held in a single, central custody but instead are held on the blockchain.