Banks are being held back by “punitive” capital requirements for bitcoin despite growing interest in the cryptocurrency, with current Basel rules making the asset “very very inefficient to hold on balance sheet”.

The market is “crying out” for banks to intermediate the trading and holding of bitcoin as collateral, but it is not currently economically feasible for banks to hold the cryptocurrency on their balance sheets, said Arnab Sen, chief executive of GFO-X, a UK-based exchange for digital asset derivatives.

Basel’s rules impose a 1,250 per cent risk weight on unhedgeable crypto exposures like bitcoin. 

Speaking on the sidelines of the Financial Times’ Digital Assets Summit in London on Tuesday, Sen told The Banker that regulation is pushing trading on to unregulated exchanges or non-credit intermediaries, as traditional players like banks are being “frozen out” of facilitating these transactions.

“I speak to the top of the house [at banks] every day. There is clear client demand to do this from large institutional clients. Today, the problem is [that] it’s not economically viable to do so,” Sen told The Banker.

Changes to Basel’s approach to bitcoin on the balance sheet are currently being discussed among regulators “across the board”, Sen said, with banks lobbying against the current restrictions, he added.

“I believe it is going [to be] revisited this year,” he said at a panel discussion on institutional adoption of digital assets.

“Banks are currently being frozen out of the asset class right now, [for] which there is large institutional end demand. So, there’s clear lobbying to change that,” he told The Banker.

The market is looking to banks to intermediate not only the trading and custody of bitcoin as collateral, but also the associated derivatives and credit intermediation it enables, Sen said, amid rising interest in the asset class from institutional investors.

“A number of the conversations we’re having [reflect] an increasing interest and comfort around digital assets and crypto,” said Marcus Robinson, LSEG’s head of CDSClear and head of DigitalAssetClear, speaking on the panel.

In particular, institutions are looking at how they can make money lending against digital assets, said Roger Bayston, head of digital assets at Franklin Templeton, also speaking at the event.

Based on conversations with banks, Sen told The Banker there is clear interest in crypto assets from lenders, with “tailwinds” expected to shift over the next 12 months.

“I think that the Basel treatment of [bitcoin] on the balance sheet will change,” Sen said, describing the repeal of SAB 121 in the US as the “first step” in that direction. 

Custody services could be one key entry point into crypto for traditional lenders, with SAB 121’s repeal making such a move less challenging.

“Now, the Basel treatment [of bitcoin] on the balance sheet is the next sort of intellectual journey that I think we will end up going on,” said Sen.