By Alma Angotti, Gino Soave, Galajo Bah
On 10 June 2021, the Basel Committee on Banking Supervision (the Committee), made up of global central bankers and regulators from the world's leading financial centers, issued a public consultation on preliminary proposals for the prudential treatment of banks' cryptoasset exposures.
The Committee is of the view that the growth of cryptoassets (defined as private digital assets that depend primarily on cryptography and distributed ledger or similar technology (FSB (2020)) and related services has the potential to raise financial stability concerns and increase risks faced by banks due to the high degree of price volatility of certain cryptoassets. These risks include liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering/terrorist financing risk; and legal and reputation risks.
The consultation builds on prior related guidance from the Committee, including a March 2019 newsletter that proposed minimum supervisory expectations for banks that are authorised, and decide, to acquire cryptoassets and/or provide related services, and a December 2019 discussion paper seeking views of stakeholders on a range of issues related to the prudential treatment of cryptoassets.
A further public consultation on capital requirements is expected before final rules are published. The Committee invites responses to the proposals by 10 September 2021.
The Committee’s existing rules require banks to assign "risk weighting/s" to different types of assets on their books, which when aggregated, determine the bank’s overall capital requirements. The new proposal requires banks to set aside enough capital to cover in full any losses on cryptoassets holdings.
The Committee further notes that while bank exposure to cryptoassets is currently limited, continued growth in exposure could increase risks to global financial stability from fraud, cyber-attacks, money laundering, and terrorist finance if capital requirements are not introduced.
The Committee proposed segregating cryptoassets into two broad groups: those eligible for treatment under the existing Basel Framework with some modifications; and others, such as bitcoin, that are subject to a new conservative prudential treatment. The Committee summarised the general structure of proposal in the following table.
Group 1 cryptoassets. These fulfill all the classification conditions set out below and as such are eligible for treatment under the existing Basel Framework (with some modifications and additional guidance).
Group 2 cryptoassets. These, such as bitcoin, are cryptoassets that do not fulfill the classification conditions set out in No. 1 above. Since these pose additional and higher risks, they would be subject to a new conservative prudential treatment.
The application of existing Basel Framework requirements (e.g., leverage and liquidity ratios), will continue to apply to both groups of cryptoassets. Likewise, additional guidance to ensure that risks not captured under minimum (Pillar 1) requirements are assessed, managed, and appropriately mitigated (including through capital add-ons). New requirements for banks to disclose information regarding cryptoassets exposures on a regular basis will also cut across both groups.
Central bank digital currencies are not within the scope of the consultation.
Guidehouse professionals who collectively combine industry and consulting experience, including in cryptoassets, can help you develop and implement the systems, controls, policies, and procedures to meet the proposed cryptoassets requirements.
Guidehouse professionals help clients address their toughest challenges with a focus on markets and clients facing transformational change, technology-driven innovation, and significant regulatory pressure. Specifically, we have been engaged by banks, non-bank financial institutions, initial coin issuers and administrators, trading platforms, virtual commodity associations, digital asset exchanges, and money service agents.
Please reach out to us if you would like to discuss further how we can assist you, to develop or review your regulatory or financial crime governance programme, or selected matters consequent of this proposal.