BANKS holding and dealing with cryptocurrencies could be forced to put more money aside to cover potential losses from the risky asset.

Regulators have proposed tough new rules amid fears that increasing interest from banks in cryptos such as Bitcoin could "increase global financial stability concerns."

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The value of cryptocurrencies such as Bitcoin and Ethereum hit record highs earlier this year but prices have crashed in recent weeks, underlining the risk and volatility when investing in virtual currencies.

Cryptos have become more popular due to high profile backing from public figures such as Elon Musk but also rising institutional interest such as from investment banks.

UK City watchdog the Financial Conduct Authority has warned that investors risk losing all their money by backing cryptocurrencies.

The Basel Committee of Banking Supervision, which is a global group of financial regulators, is the latest to express concerns.

5 risks of crypto investments

THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.

  • Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements. 
  • Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
  • Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market. 
  • Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.  
  • Marketing materials: Firms may overstate the returns of products or understate the risks involved.

It has warned that cryptocurrencies have the potential to "raise financial stability concerns and increase risks faced by banks."

A discussion paper launched by the committee also warned that involvement with cryptos could make banks targets for fraud and cyberattacks.

They also creates extra risks of terrorist financing, money laundering as well as legal and reputation issues, the committee said.

To counter this, the group has proposed introducing new "conservative prudential treatment" for banks investing in or trading cryptocurrencies such as Bitcoin.

All banks must hold extra money aside when they are lending or trading any money, this is known as their capital requirements.

It ensures they can afford to operate and cover any losses such as from unpaid loans.

Under the Basel proposals, banks dealing in cryptocurrencies would have to stash even more aside to reflect the risk of the asset.

Nick Spanos, founder of the US-based crypto resource website Bitcoin Center NYC, said regulation could be a good thing.

He told The Sun: "Even if the standards are initially conservative, as they are priced into the market fundamentals, Bitcoin is going to rise.

"This is because having some pathway forward for clients is better than none at all — or being intimidated by the potential for drastically unfavourable rulings against crypto."

Nigel Green, chief executive of advisory firm the deVere Group, agreed that strict capital requirements could be good for the value of cryptos.

He said: "The tough stance set out by The Basel Committee on Banking Supervision would further help protect investors, shore-up the market, tackle criminality, and reduce the potential possibility of disrupting global financial stability, as well as offering a potential long-term boost to those banks that introduce it.

"As the market becomes ever more robust, prices will climb higher."

Susannah Streeter, senior investment and markets analyst for Hargreaves Lansdown, warned that the move could make crypto trading more expensive.

She said: "By effectively making banks put aside enough capital to cover 100% of potential losses, it would make crypto currency dealing and investment very expensive and is likely to limit the number of new institutional entrants into the crypto world.

"But by bringing crypto currencies into the regulatory sphere, it does add more legitimacy to the currencies, despite their high risk price tag.

"Lower financial buffers would be needed for stablecoins, which are seen as less volatile as they are pegged to currencies like the dollar. It is clear regulators want to push the financial industry towards these digital assets and away from the crypto Wild West."

Goldman Sachs, Standard Chartered and BNY Mellon have all launched crypto desks.

It can be harder if you want to buy and sell cryptos yourself though as some banks have taken a more cautious approach with high street customers.

For example, Barclays and Monzo have blocked account holders from transferring funds to crypto exchanges.

It comes after El Salvador became the first country to recognise Bitcoin as legal tender.

The price of Bitcoin slumped again this week after former US President Donald Trump branded the world's largest cryptocurrency a "scam"

People considering investing in Bitcoin or shares and stocks have been warned over "risky" tips being shared on TikTok.

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