Central Bank of the Bahamas.
By NEIL HARTNELL
Tribune Business Editor
The Central Bank of The Bahamas has received push back to its proposal that banks must not accept crypto currency deposits, or make such loans, to customers.
The regulator, unveiling industry feedback to its discussion paper on regulating the fintech (financial technology) and digital space, responded to calls for clarification and suggestions on how such deposits and credit facilities can be extended.
Besides barring crypto loans and deposits, the Central Bank’s initial regulatory offering prohibited banks from extending loans to clients so they could purchase crypto assets, while arguing that “price volatility and uncertainties around valuation” meant they could not be pledged as security for other loans by customers.
However, in response to industry queries, it clarified its position by revealing that “credit may be extended for the purchase of crypto assets where the credit is fully secured by cash or other assets, and the exposure created is not directly to the crypto asset”.
“There will be no prohibition against extending credit to clients for the purchase of crypto assets. Banks, however, may not create direct exposures to such instruments through credit practices. Credit should be backed by cash or a low-risk asset,” the Central Bank added.
“Banks would also be responsible for advising customers that crypto assets are considered to be foreign assets, and therefore investment in these assets would have to be processed via the Investment Currency Market (ICM).”
The Central Bank issued its responses to the feedback it received on the same day that the Securities Commission unveiled its own draft legislation, the Digital Assets and Registered Exchanges Bill 2019 (or DARE Bill), that is designed to create a crypto/digital regulatory regime for its own licensees.
Several respondents to the Central Bank consultation, though, “respectfully disagreed” that there should be a prohibition on banks and trust companies taking crypto deposits and/or making crypto loans.
“While there is price volatility, it is still a quantifiable volatility,” one unnamed respondent argued. “Below are historically the largest drops, with the largest single day drop in the last three years averaging at about 11 percent per day. An automatised credit structure margin calling at 60 percent of collateral value, while only lending 30 percent of the Bitcoin value in custody, would have protected loan issuers from even the largest historical drops.
“We note that today we have the tools to adapt credit terms based on liquidity and price action of the asset class held in collateral. The digital asset market also trades 24/7 so it is not exposed to off-hour crisis risk that the traditional markets are exposed to overnight and at weekends.
“A structure with approved sub-custodian holding custody, with an automatic margin call, appropriate conservative levels for lending (for instance no more than 30 percent), would bring safety to loans collateralised by digital assets. There are today instruments monitoring LTV by the minute and able to automatically sell the digital assets as soon as it reaches a certain threshold (for instance 20 percent above the approved level).”
The Central Bank, though, replied that such mechanisms were more appropriate for brokerage firms than its bank and trust company licencees. Another respondent, meanwhile, argued that financial institutions “with proper regulation and integration for usage of technological-based products and services can take advantage of being partnered with a technological system that will enable the institution to access these services in a technologically-regulated manner”.
While promising to consider this thought, the regulator added that technology and software to facilitate regulatory technology - so-called Regtech - was key to the success of such a proposal.