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Basel Committee's mistaken view of Cryptoassets

Nigel Morris-Cotterill

On 13 March, the Bank for International Settlements Basel Committee issued a statement regarding "crypto-assets." Some of its basic assumptions are wrong and fundamentally misleading.

The statement, to be found at https://www.bis.org/publ/bcbs_..., says "While crypto-assets are at times referred to as "crypto-currencies", the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. "

It is not unreasonable to consider that crypto-currencies are risky investments, so are shares. And currencies. So the criticism of crypto-currencies as unsafe doesn't hold water unless other inherently volatile assets are included. What it means is that they are traded on broadly unregulated markets. Then again, so are many shares. The view is not wrong, but it is wrong to isolate crypto-currencies as particularly risky. The BIS/Basel Committee is, of course, right to question the effect on banks of taking risky assets as security but, again, the same risks apply to shares and fiat currencies.

But it is the first part of the statement, that "such assets do not reliably provide the standard functions of money " that is wrong. It is so wrong that one has to wonder if anyone at BIS understands what money actually is. Before the notice, such a question would have been facetious: now, not so much.

The case against crypto-assets is stated thus: "Crypto-assets are not legal tender, and are not backed by any government or public authority." To that, the economist, trader, even financial crime practitioner (regardless of which side of the fence he sits on) must say "tosh. That is not what money is."

Money is not a store of value. Or rather, it is not only a store of value. And it is not the only store of value. Gold is a store of value. Some recognise it as money, some don't but everyone recognises it as a record of value and a thing that has intrinsic value.

The report says "Crypto-assets have exhibited a high degree of volatility and are considered an immature asset class given the lack of standardisation and constant evolution." No argument there, but that does not invalidate their use as a medium of exchange which is the essence of money. It is not necessary for money to be "legal tender" nor "government-backed. That is a dangerously naive view of money.

What the Basel Committee is trying to do is to raise awareness of the risks of dealing in or taking as security any crypto-asset. Quite right, too. The lack of understanding of the risks can easily cause problems for a bank. Then again, so can taking shares as security. Banks already know what to do about that: they value portfolios, lend a percentage and if the equity margin changes they require borrowers to increase their security or reduce their debt. Nothing new there, then.

So, while BIS / Basel Committee is absolutely right to warn of the risks, even to define crypto-assets as a novel asset class, it is wrong to do so adopting a misrepresentation of the position.

Oh, and while they are at it, they should reconsider the note "Crypto-assets differ from central bank digital currencies." That is a political statement that has no basis in reality or fact. If one wants to consider crypto-currencies as virtual currencies there are a number of examples. Zimbabwe printed IOUs when it ran out of money as hyper-inflation took hold. There is absolutely no fundamental difference between that and a central bank issued crypto-currencies. And I know: I was the one who suggested, in 2015, that the Greek government do exactly that, running an electronic currency in parallel with the Euro. See "Geeks for Greeks - solving the Greek Debt Crisis" at https://www.pleasebeinformed.c....