Basel Committee Publishes Second Consultation on Bank Cryptoassets Exposures
Posted by Colin Lambert. Last updated: July 1, 2022
The Basel Committee on Banking Supervision has launched a second public consultation on the prudential treatment of banks’ cryptoasset exposures and far from diluting its ideas, as the financial markets industry has argued it should, the committee appears to be extending the proposed regulation’s reach.
The committee says the basic structure of the proposal in the first consultation is maintained, with cryptoassets divided into two broad groups: Group 1 including those eligible for treatment under the existing Basel Framework with some modifications. Group 2 including unbacked cryptoasset and stablecoins with ineffective stabilisation mechanisms, which are subject to a new conservative prudential treatment.
The updated proposals provide more detail on the proposed standard and include new elements such as an infrastructure risk add-on to cover the new and evolving risks of distributed ledger technologies; adjustments to increase risk sensitivity; and an overall gross limit on Group 2 cryptoassets. They include a proposal to introduce an exposure limit, which will initially limit a bank’s total exposures to Group 2 cryptoassets to 1% of Tier 1 capital.
They aim to address the issues raised by respondents with regards to the initial proposals, and seek to achieve the general principles set out in the first consultative document of “same risk, same activity, same treatment”, simplicity, and minimum standards to which jurisdictions are free to apply additional measures if warranted.
Although at a high level the proposals are largely unchanged, there is a glimmer of light for derivatives users, with the second consultation observing “Group 2 cryptoassets that meet a set of hedging recognition criteria may be subject to modified versions of the market risk requirements, which permit a limited degree of hedge recognition in the calculation of a bank’s net exposure.”
This may go some way to meet concerns expressed by ISDA in particular that the proposed regulation largely ignored the benefits of hedging using crypto derivatives.
Given the rapid evolution and volatile nature of the cryptoasset market, the Committee says it will continue to closely monitor developments during the consultation period. The standards that the Committee aims to finalise around year-end may be tightened if shortcomings in the consultation proposals are identified or new elements of risks emerge and based on the Committee’s overall assessment of the risks.
Responses should be submitted by 30 September 2022.