Basel Committee Offers More Clarity To Banks Seeking Crypto Exposure
In a move that could lead to new requirements being imposed on banks that deal with cryptoassets, the Basel Committee on Banking Supervision (BCBS) has issued a proposal to limit such banks’ crypto exposure by applying new credit and market risk requirements.
“Cryptoassets have given rise to a range of concerns including consumer protection, money laundering, and terrorist financing, and their carbon footprint,” the paper said, providing insight into how representatives of legacy finance view cryptoassets. It also declared that the BCBS “has taken steps to address these risks.”
The Committee said that the growth of cryptoassets and related services could potentially "raise financial stability concerns and increase risks faced by banks."
Furthermore, it stated that certain cryptoassets have shown "a high degree of volatility," and that these could present risks for banks as exposures increase, including: liquidity, credit, market, money laundering / terrorist financing, legal, and reputation risks, as well as operational risk, such as fraud and cyber risks.
With this in mind, the BCBS proposes new prudential requirements for two groups of cryptoassets:
- for tokenized traditional assets, capital requirements are to be made at least equivalent to those applied to traditional assets, while new guidance on the application of current rules is to be issued for stablecoins, to capture the risks related to stabilization mechanisms;
- for cryptoassets that do not qualify as tokenized traditional assets, such as bitcoin (BTC) and other cryptocurrencies, the committee proposes the application of “conservative prudential treatment” based on a 1,250% risk weight applied to the maximum of banks’ long and short positions.
The latter group of cryptoassets poses “additional and higher risks compared with Group 1 cryptoassets” owing to which it must “be subject to a newly prescribed conservative capital treatment,” according to the proposal.
In practice, this means that banks would be required to boost their capital reserves, e.g. for investments in cryptoasset derivatives such as exchange-traded funds that track bitcoin’s price.
It is yet to be seen how the proposal, which might be significantly altered before it's enforced, impacts the plans by a number of banks that are gearing to expand their exposure to crypto.
Among others, UK bank Standard Chartered recently announced its partnership with digital asset investment holding company BC Group to open a digital asset brokerage and exchange platform for institutional and corporate clients in the UK and Europe, targeting the fourth quarter of 2021.
In a statement, the committee says it is awaiting feedback on its proposal until September 10.
"Given the rapidly evolving nature of this asset class, the Committee is of the view that policy development for cryptoasset exposures is likely to be an iterative process, involving more than one consultation," they said.
The BCBS acts under the auspices of the Bank for International Settlements (BIS) which is jointly owned by the world’s 62 central banks, representing countries that together represent some 95% of the global gross domestic product (GDP).