Virtual currency brokers: cryptocurrency platform supervision -Part 11


Si Gyeongmin

Oct 24, 2021

(2) Net capital rules

The basic framework of net capital rules can be applied to cryptocurrency platforms. Like securities companies, the net capital of cryptocurrency platforms will be adjusted under GAAP. First, net capital will exclude illiquid assets, and then the platform will apply a predetermined deduction calculation to its assets based on the risk profile of these assets. Since the price of cryptocurrency is very volatile, its haircut may be quite high.

A related question is whether to apply uniform standards to all cryptocurrencies or deductions per currency. Given the short history of cryptocurrency, a unified deduction is more appropriate. The current net capital rules are roughly risk-sensitive: with a few exceptions, deductions are based on the asset class level, which means that there is no difference between the stocks of high-risk biotech startups and the stocks of large utility companies. The same situation can also be applied to cryptocurrencies. Based on the amount of data for which risk cannot be assessed, poorly recorded capital requirements, and lack of representative price data, a unified deduction for cryptocurrencies is the most appropriate.

(3) Bankruptcy and insurance

A cryptocurrency platform facing bankruptcy may be subject to a liquidation plan similar to SIPC. In the event of bankruptcy, the trustee will favor the physical distribution of cryptocurrency to customers rather than the liquidation of cash. In addition, under the same liquidation plan as SIPC, customers have priority over ordinary creditors who are bankrupt. Insurance plans similar to SIPC can also be applied to cryptocurrency platforms. However, in view of the special costs and risks of hackers, it is not appropriate to include the cryptocurrency platform under SIPC's jurisdiction, because it will impose the costs and risks of hacker attacks on traditional securities companies.


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