The Bank of International Settlement (the so-called Bank of Central Bank) has published a consultative paper on the prudential treatment for cryptoassets. The public has until September 10th to address comments. This is a first review, not an extensive analysis.
The impact of prudential treatment is quite important as this will limit banks to invest or use crypto assets and stablecoins. This topic was raised as one of our prospects for RWA is a big bank. As DeFi is based on price (collateral-based lending, for which the collateral price should be efficient), it is important that financial institution can put their huge balance sheet at work. Preferably using DAI than USDC.
Prudential rules 101
For banks, the main metric for prudential treatment is the Core Equity Tier 1 ratio (CET1 ratio). In Maker parlance, it’s the ratio of the surplus buffer divided by a risk-weighted sum of assets exposures. A bank is usually above 10% on that metric.
We currently disclose a CET1 ratio for MakerDAO where each crypto-backed loan is weighted 100%, ETH-B is weighted 200% and stablecoins (via crypto loans or PSM) are weighted 0%. Quite arbitrary for now, but will give you a reference for the rest of the post.
From the document:
The first learning of the proposal is that if you hold a crypto asset like ETH, MKR or WBTC (group 2), you should give it a 1250% weight (or x12.5). With the 8% CET1, if you have only riskless assets (like Fed deposits or Treasuries) and crypto assets, you can lose all the value of the crypto asset and still be fine regarding your customer deposits/stablescoins.
For comparison, Microstrategy shares would be 300% weighted (publicly traded equity). 1250% is the maximum in the regulation.
The second learning is that if you hold a tokenized RWA (real-world asset, group 1.A) the risk weight is the one of the underlying. So a PSM-PAXG might be a very small risk (8% it seems due to the currency risk).
So PSM-ETH 1250% risk-weighted, PSM-PAXG 8%.
To be in group 1 you need to have a stabilization mechanism that works at all times. This is defined as:
The difference in value must not exceed 10bp of the value of the underlying traditional asset more than three times over a one-year period."
Stabilisation mechanisms that: (i) reference other cryptoassets as underlying assets (including
those that reference other cryptoassets that have traditional assets as underlying); or (ii) use
protocols to increase or decrease the supply of the cryptoasset; are not considered to meet this
So exit DAI and all algorithmic stablecoins.
So DAI is one of the most risked asset on earth for Basel iii.
USDC is most likely Group 1 (a or b) so costing very little capital while DAI is considered extremely risky, and therefore costly. This is obviously not good for MakerDAO competitiveness going forward. More broadly, the proposal is not satisfactory as it doesn’t make a difference between ETH and the last memecoin and doesn’t recognize governance tokens as equity of startups.
If this interpretation is correct, it would be wise to answer this call for comments and try to get more adequate regulation.