Basel Committee Consults on Crypto Assets
Posted by Colin Lambert. Last updated: June 10, 2021
The Basel Committee on Banking Supervision has commenced a public consultation on preliminary proposals for the prudential treatment of banks’ cryptoasset exposures, which flags a tougher capital regime for cryptocurrencies like bitcoin.
The Committee says that while banks’ exposures to cryptoassets are currently limited, the continued growth and innovation in these products and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.
Given the rapidly evolving nature of this asset class, the Committee says it believes that policy development for cryptoasset exposures is likely to involve more than one consultation. This initial public consultation, which follows a discussion paper published in December 2019, will allow further work to continue with the additional benefit of incorporating feedback from external stakeholders.
The proposed prudential treatment outlined in the consultation divides cryptoassets into two broad groups:
- Group 1 cryptoassets – these fulfil a set of classification conditions and as such are eligible for treatment under the existing Basel Framework (with some modifications and additional guidance). These include certain tokenised traditional assets and stablecoins.
- Group 2 cryptoassets – are those, such as bitcoin, that do not fulfil the classification conditions. Since these pose additional and higher risks, they would be subject to a new “conservative prudential treatment”.
The Committee stresses that central bank digital currencies (CBDCs) are not within the scope of the consultation.
It adds that the prudential treatment of cryptoassets set out in the paper has been guided by the following general principles:
- Same risk, same activity, same treatment: a cryptoasset that provides equivalent economic functions and poses the same risks compared with a “traditional asset” should be subject to the same capital, liquidity and other requirements as the traditional asset. As a starting point, the prudential framework should apply the concept of “technology neutrality” and not be designed in a way to explicitly advocate or discourage the use of specific technologies related to cryptoassets. The prudential treatment should, however, account for any additional risks arising from cryptoasset exposures relative to traditional assets.
- Simplicity: The design of the prudential treatment of cryptoassets should be simple. Cryptoassets are currently a relatively small asset class for banks. As the market, technologies and related services of cryptoassets are still evolving, there is merit in starting with a simple and cautious treatment that could, in principle, be revisited in the future depending on the evolution of cryptoassets.
- Minimum standards: Any Committee-specified prudential treatment of cryptoassets would constitute a minimum standard for internationally active banks. Jurisdictions would be free to apply additional and/or more conservative measures if warranted. As such, jurisdictions that prohibit their banks from having any exposures to cryptoassets would be deemed compliant with a global prudential standard.
Comments on the proposals can be submitted here and the deadline for submissions is 10 September 2021. All submissions will be published on the BIS website unless a respondent specifically requests confidential treatment.
The full consultation paper is available here.