The Empire strikes back!
Here is our pick of the 3 most important Stablecoin news stories during the week.
This week it was all about the fightback against Crypto and stablecoins by the Central Banks and Regulators.
First we had assurances that central bank digital currencies (CBDC) could be “tens of thousands of times more efficient per transaction” than Bitcoin.
During his speech at the Future of FinTech Conference on Thursday, Tom Mutton gave attendees an overview of the Bank of England’s current standing on CBDCs.
Much of Mutton’s speech reiterated the bank’s noncommittal interest in the development of a CBDC and its purported commitment to keeping cash “available for as long as [people] wish to use it.” However, he also addressed feedback from a 2020 survey on CBDCs done by the bank.
Then we heard about the disruption from a digital euro, which could deplete bank deposits by 8%, according to a Morgan Stanley report cited by Reuters. The U.S. investment bank based its estimate on a scenario where all citizens in the euro region aged 15 and older transfer €3,000 ($3,600) into a European Central Bank (ECB) digital wallet, Reuters reported Tuesday.
Morgan Stanley said a “bear case,” using €3,000 as an amount because it was mentioned by ECB policymakers as a theoretical cap for citizens to hold. “This could theoretically reduce euro-area total deposits, defined as households’ and non-financial corporations’ deposits, by €873 billion [$1.06 billion], or 8%,”.
Smaller euro-zone countries – such as Greece, Latvia, Lithuania and Estonia – would be hit the hardest. In these countries, converting €3,000 would be equivalent to 22%-51% of household deposits and 17%-30% of total deposits.
We also got some analysis on the discussion paper to enable Banks to hold Crypto assets. For banks that meet the Basel minimum capital requirement, the 1250% weighting is equivalent to 100% equity collateralisation of Group 2 cryptoassets. However, most banks nowadays have more capital than the 8% minimum. For them, the 1250% weighting is overcollateralization.
To give an example: in 2020, JP Morgan’s capital ratio was 13.1%. Applying this to the Basel formula above gives a capital requirement of $163.75 for every $100 of Group 2 crypto asset exposure. That is significant overcollateralization.
This capital requirement applies to both short and long positions. There’s also a recommendation that supervisors apply an additional capital requirement to short positions because potential losses are unlimited:
These capital requirements are by any standards draconian. They would make it prohibitively expensive for banks to take leveraged positions in cryptocurrencies. This might sound like a good thing – after all, it was excessive leverage that caused the 2008 crash. But for banks, it amounts to banning them from holding or trading crypto on their own account.
So in summary we saw European Regulators make it very difficult for Banks to participate directly in Crypto trading. The Central Bank of Great Britain assured us that a CDBC would never operate anything like Crypto and JP Morgan warned us that a CBDC if it is implemented as a direct call on Central Bank assets, would decimate existing commercial banks. As the Empire strikes back, Master Yoda needs to start teaching Luke Skywalker a few new tricks or this exciting technology will be pushed to another galaxy far far away.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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