Basel III is a big deal for gold, for central banks, for macroeconomics, and possibly cryptocurrencies, but chances are you probably haven’t heard of it. Let’s take a quick look at some facts together.
The 2008 crisis caused great damage to the global banking system. Many banks had many risky assets on their balance sheets that depreciated, leading to economic collapse or financial bailout at the expense of taxpayers. An example of a high risk asset would be a high volatility commercial real estate loan (HVCRE) where the borrower only pays a small initial amount (usually less than 20% of the total loan cost).
As a result, the international banking supervisor, the Basel Committee on Banking Supervision (BCBS), has developed new guidelines for banks around the world to increase minimum capital requirements, reduce their debt and hold more and more higher quality assets as protection against 2008 bankruptcies. … These new recommendations are commonly referred to as Basel III. It should be noted that while the Basel Recommendations are not binding, the BCBS has members from virtually every developed country in the world who are discussing the recommended rules in an attempt to avoid major or systematic economic setbacks as they hurt all countries.
Physical and “paper” gold
Basel III’s notable recommendation was that physical gold bullion was reclassified as a more important asset when calculating whether a bank meets its minimum capital requirements. In the past, many banks preferred to hold “unallocated” gold rather than physical gold itself as part of their reserves, but now keeping unallocated gold does not help meet their requirements. Retained gold (or paper gold as it is often called) basically means that you have an IOU for some physical gold from a bank or a future piece of gold after it is produced. This sounds fine in theory, but the problem with paper gold is usually that banks issue more IOUs than there is real gold and future gold, and they view these IOUs as equal in value to physical bullion.
Basically, Basel III means that physical gold has become much more important in the banking world, and I think it would be reasonable to assume that banks will be looking to get more of it for the foreseeable future.
Why is this important for cryptocurrency?
Well, many in the cryptocurrency space are promoting BTC as a form of digital gold, a new “store of value” that could replace gold as the ultimate reserve form of wealth; in the eyes of some, it is more a question of “when” than “if”. Aside from the hyperbolic promoters, I have observed that there is no consensus on the status of BTC as hard money, especially due to the growing concerns about fungibility that some miners and consortia are pushing for clean / unmixed or green coins.
Regardless of whether markets and market prices are shaped by both perception and reality, and if significant players view gold and BTC as correlated (or as competitors), the outcome of the Basel III rules will somehow affect BTC and thus the rest. part of the crypto market. Perhaps gold will rise due to demand from banks and BTC will continue its long-term correction. Perhaps gold will jump, and with it BTC. Perhaps in light of the continuing rhetoric of debt-laden bureaucrats about the Great Reset, gold bullion and BTC will rise as individuals and corporations seek inflation hedges in US dollars and euros. Perhaps nothing will happen at all and the manipulation of gold prices will continue.
I do not pretend to be true, but the Basel III recommendations should take effect on June 28 for European banks (and January 1, 2022 for British banks), so we will keep an eye on what happens to gold and cryptocurrency on these dates.