TradFi Pushes Against Caps on Crypto Holdings Because of ‘Balance Sheet Leakage’

If you just read this headline on Coindesk you’d think some of TradFi is doing a 180 on their broad hostility to cryptocurrency.

“Prohibitive” caps on crypto holdings could derail innovations using distributed ledger technology, a coalition of eight traditional finance (TradFi) lobby groups told international standard-setters in a document published Tuesday.

The Basel Committee on Banking Supervision – a grouping of international regulators responsible for ensuring banks issue enough capital to cover financial risks – is developing rules that could prove crucial to the adoption of crypto by the TradFi sector.

OK. So far, so good.

That hard cap is “prohibitive and should be recalibrated,” TradFi representatives, including the Global Financial Markets Association and Institute for International Finance, said in response to the consultation, which closed on Friday.

If the issue isn’t addressed, “it may not be economically viable and rational to make the investments necessary to facilitate clients’ needs on crypto asset-related activities, which likely would result in a shift of activity in this space to the nonbank sector,” which is less regulated, the document said.

And there it is. This is not about a general concern from TradFi that existing regulations could prevent the adoption of crypto. Oh, no. This is about what the banks call “balance sheet leakage.”

Increasingly, Millennials and Gen Z – and even to a lesser degree Gen X – don't see much utility in banking when you get zero return and transactions can take up to two days to clear. So they use non-traditional systems like Venmo, CashApp, and, to a lesser degree thus far, cryptocurrencies instead. Those applications offer more useful features and can include non-trivial yields on parked cash.

The banking sector is admitting that customers will flow to non-regulated markets because they can and do offer better and more interesting features, and unless banks are deregulated then they won't be able to compete.

And no amount of hiding behind “regulations are good for customers’ safety” can change that.