Basel Bank Capital Rules Create “Chokepoint” Slowing Crypto Industry Growth, Says Investment Leader
The stringent capital reserve requirements imposed by international banking regulators are making it prohibitively expensive for banks to engage with cryptocurrencies, stymying expansion in the crypto sector, according to Chris Perkins, president of CoinFund, an investment firm specializing in crypto assets.
Capital Reserve Requirements Impacting Crypto Engagement
The Basel Committee on Banking Supervision (BCBS), which sets global banking standards under the aegis of the Bank for International Settlements (BIS), mandates high capital reserves for banks holding crypto assets. This regulatory framework effectively reduces banks’ return on equity (ROE)—a key profitability metric—because banks must allocate more capital toward crypto holdings than traditional assets. Perkins explained to Cointelegraph that this decrease in ROE creates a subtle yet powerful "chokepoint" that discourages banks from investing in or facilitating cryptocurrency activities.
“It’s a different type of chokepoint, in that it’s not direct," Perkins noted. “It’s a very nuanced way of suppressing activity by making it so expensive for the bank to do activities that they’re just like, ‘I can’t.’ If I have a certain amount of capital I want to invest, I’m going to invest it in high ROE businesses, not low ROE businesses."
Regulatory Context and Criticism of BIS Proposals
In April, Perkins publicly criticized the Bank for International Settlements for proposing that decentralized finance (DeFi) protocols and stablecoins adhere to strict regulatory standards akin to traditional banks, including know-your-customer (KYC) requirements. He argued that applying legacy banking regulations to permissionless, decentralized networks undermines their foundational principles and ignores their unique systemic properties.
Perkins highlighted the intrinsic systemic risk in traditional finance stems from its inability to adapt to modern technology. “The real systemic risk to the financial system comes from the asymmetry of having online, permissionless, 24/7, peer-to-peer, decentralized networks that can shift liquidity in real time, while traditional financial infrastructure closes on nights and weekends and refuses to adapt to changing technology,” he said.
BIS Reports Highlight Concerns Over Crypto Stability and Regulation
The BIS, often described as the "central bank for central banks," released an April report warning that the growing crypto market could destabilize the broader financial system. The report also raised social concerns, suggesting that cryptocurrency adoption might exacerbate wealth inequalities and urged stricter regulatory oversight.
Following up in June, the BIS issued another report focused on stablecoins, titled “Stablecoin growth: Policy Challenges and Approaches.” The report suggested that stablecoins fail to function as reliable money and carry potential systemic risks, especially as their cross-border use increases and their integration with the traditional financial system deepens.
“Stablecoins’ rising market capitalization and increasing interconnections with the traditional financial system have reached a stage where potential spillovers to that system can no longer be ruled out,” the BIS authors wrote.
Push for Central Bank Digital Currencies (CBDCs)
In response to these perceived risks, the BIS has consistently advocated for the development and adoption of central bank digital currencies (CBDCs) and other centralized digital monetary technologies. These are positioned as safer, regulatory-compliant alternatives to decentralized cryptocurrencies and privately-issued stablecoins.
Industry Perspectives and Future Outlook
The conversation around regulatory chokepoints comes as the crypto industry continues to face evolving scrutiny from global financial regulators. While the Basel capital rules aim to guard traditional banking stability, critics argue that they also hamper innovation and the financial sector’s ability to incorporate new technologies.
Perkins’ remarks underscore a growing tension between legacy regulatory frameworks and the disruptive nature of decentralized finance. The debate continues as stakeholders weigh the benefits of crypto innovation against the need for systemic financial safeguards.
Reported by Vince Quill for Cointelegraph
Disclaimer: This article is for informational purposes only and does not constitute financial advice.