Bloomberg reported today that Standard Chartered Plc is launching a spot crypto trading desk for Bitcoin and Ether in London, citing sources. The unit will be part of the FX trading desk.
An emailed statement from the bank said it had been working with regulators to support institutional demand to trade Bitcoin and Ethereum.
Banks such as Goldman Sachs run derivatives trading desks, but spot desks are relatively rare in banks.
Basel rules explained
The reporter noted that the Basel rules for cryptocurrencies make it unattractive for banks to be exposed to cryptocurrencies because they impose a 1250% risk weighting.
However, we’d observe that isn’t necessarily the case. For a small group of the more prominent cryptocurrencies, some hedging is allowed. In other words, the risk weighting only applies to the net holdings. The rules are stricter than most other asset classes. For example, only 65% of the hedging position can be netted amongst other restrictions.
Part of the reason for the bank working with regulators is that the crypto-asset has to meet certain criteria in order to qualify for hedging and the bank has to demonstrate it.
Why now?
The timing may be directly linked to the Basel hedging rules.
A crude summary of the three hedging criteria is as follows:
- an ETF or ETN listed on a regulated exchange dedicated to the crypto-asset
- an average market capitalization of $10 billion+ last year for the crypto
- sufficient data on prices, trading volumes and market capitalization.
Crypto ETNs started trading on the London Stock Exchange at the end of last month, meaning the first criterion is likely now met.
Additionally, Basel imposes an overall exposure limit, so crypto exposures cannot exceed 1% of Tier 1 capital.
Meanwhile, Standard Chartered already has a crypto OTC trading firm Zodia Markets and a custody firm Zodia Custody. Both are incorporated in London. Its tokenization venture Libeara is based in Singapore. Additionally, SC Ventures is involved in numerous other web3 initiatives.
