What are the risks to the banking system and depositors if Russian financial organizations are directly or indirectly involved in the cryptocurrency market?
Investments by banks in cryptocurrencies have become a fairly common global practice. The stability of the system and the level of risk depend not so much on the fact of investing in cryptocurrencies as on the size of positions and the quality of regulation. The Bank of Russia itself pointed out in one of its reviews that Bitcoin demonstrated the highest return among investment instruments, which reflects both its potential and associated risks (see the Central Bank of the Russian Federation Review "Returns on Investments in Russian Financial Market Instruments"). Usually, regulators establish a maximum share of cryptocurrencies in bank capital at 1-2%. Having Bitcoin or tokens with institutional support (e.g., Ripple) on a bank’s balance sheet is not critical in itself, but large volumes and high volatility in the crypto market can create liquidity risks, cause a “domino effect,” and intensify the correlation between traditional and digital markets. Therefore, regulations have already been introduced in a number of countries: the Basel Committee approved limits on exposure to “risky” crypto assets, the EU and Canada have established ceilings on the share of cryptocurrencies in capital, and the OCC in the US has allowed banks to work with digital assets subject to proper risk control.
Why might supervised organizations use cryptocurrencies to hedge risks – is this an innovative tool or an attempt to circumvent restrictions and rules?
Limited investments in cryptocurrencies today are more likely perceived as a new tool for portfolio diversification and potential return enhancement. It is difficult to imagine a situation where banks can bypass regulatory requirements for reserves or capital adequacy using cryptocurrencies, especially if the positions are within 1-2% of capital. Regarding hedging classic financial risks, cryptocurrencies are unlikely to perform such a function: their high volatility makes this instrument more speculative than protective.