On Friday the Depository Trust Company (DTC) published an update regarding the valuation of collateral it accepts for settlement purposes. To the dismay of the crypto community, the DTC applies a 100% haircut on any Bitcoin ETFs, crypto funds or investment vehicles that include crypto. This means it effectively doesn’t accept crypto as collateral. The DTC is a clearinghouse for settling trades, processing $446 trillion of conventional transactions in 2023, and is a subsidiary of the DTCC.
There are at least two sound reasons why crypto gets a 100% haircut. The first is its inherent volatility and lack of ratings, characteristics that makes it a risky asset for collateral. The second reason is the Basel Committee rules for bank exposure to cryptocurrencies.
To settle transactions and avoid exposing the DTC to too much risk, participants must provide cash or collateral exceeding the amount they owe. If they go overdrawn, transaction settlement will be delayed.
The DTC is not a bank, so it’s dependent on lines of credit from 34 banks. Hence, collateral is valued using the prices the night before, and a haircut is applied based on what the banks are willing to advance.
Other risky assets also get 100% haircuts
All securities are subject to a haircut, with those with higher volatility or credit risk subject to bigger haircuts. Treasuries attract a haircut ranging from 2% to 12% for longer dated securities. Mortgage backed securities rated below Aa2/AA also receive a 100% haircut even if issued by a US Government Sponsored Enterprise. Similar rules with different cut off points apply to other securities such as corporate bonds.
Given the potential for crypto volatility and the lack of credit rating, a 100% haircut is consistent with rules for other assets.
Basel crypto rules
Additionally, banks are subject to Basel Committee rules for crypto-assets. Basel doesn’t consider cryptocurrencies or stablecoins as eligible collateral. That means any loan using crypto as collateral would be considered unsecured for risk-weighting purposes. Hence, a bank must set aside additional capital, making it too expensive.
