Bitcoin has Helped ‘Mine’ a Capital Idea for Fossil Fuel Finance
By James Vaccaro, June 2021
Central Bankers who form the Basel Committee on Banking Supervision (BCBS) issued a proposal to increase the capital held against cryptocurrencies that a bank holds by 1250%. That’s the equivalent of holding full equity against the risks of holding or trading currencies like Bitcoin on its books. Commentators have said that the move amounts to saying to banks: “don’t do it, but if you do, put your own money at risk - not other people's”
Why would the central bankers step in with such consequential action? Several reasons are given by the BCBS who list concerns generated by cryptocurrencies including: “consumer protection, money laundering and terrorist financing, and their carbon footprint”. The major concern however, is financial stability:
“Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks.”
Let’s compare the announcement with what Central Bankers could be doing for fossil fuels. The IEA have set out their new scenario (NZE2050) which lays out steps required to prevent global climate change beyond 1.5oC – this includes an immediate halt to investment into the expansion or exploration of fossil fuels. In 2020, Finance Watch set out a proposal for capital held against new fossil fuels to be increased by 1250% (e.g. full equity backing – thereby making banks put their own money at risk – not other people’s). This was deemed to be the most impactful and feasible intervention in climate policy in a research report by Climate Safe Lending Network in 2021. Similar proposals have echoed this (such as the paper by CAP in the US earlier this year) together with comprehensive interventions to tackle existing fossil fuel finance via the banking system and financial intermediaries in the shadow banking system.
Bitcoin & Banks
But the central banks are not there yet. Despite the Bank of England launching a climate stress test, the Governor, Andrew Bailey has stated that capital rules will not be changed no matter what is discovered. He said recently:
"Any incorporation of climate change into regulatory capital requirements would need to be grounded in robust data …in my view, the case for this has yet to be clearly established and possibly may never be."
But what if the ‘robust data’ doesn’t show up until we’ve used up the carbon budget and locked in irreversible climate change? Who’s responsibility will it be and how can financial regulators manage financial stability then?
A world beyond 1.5
With support of the G7 the TCFD is well on the path to becoming mandatory meaning that financial institutions will have to disclose their climate risks (they will also now include carbon accounts). Notice, in comparison that the regulators have not set up a Taksforce for Crypto-Related Finance Disclosures, they’ve changed the rules. Can they predict the future volatility of cryptocurrencies more accurately than climate change impacts? For bitcoin, central banks appear to be applying the precautionary principle. There’s no reason that they cannot use the same approach to climate change (an approach endorsed by leading experts like Sarah Bloom Raskin).
Whilst scenario models might not predict everything in the future, what we do know is that we are heading to a world beyond 1.5degrees where: we are likely to lock-in carbon intensities that may trigger feedback loops and hasten the breakdown of natural systems that have supported life on earth; to avoid this, we may witness the ‘inevitable policy response’ causing huge price shocks, write-offs, and stranded assets.
Betting on bitcoin might undermine financial stability. The finance flowing into fossil fuels is gambling on future of the planet.
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