GFMA, ISDA Join Forces to Pushback on Basel Rules for Crypto

Major financial market associations have written a joint letter to the Basel Committee on Banking Supervision (BCBS) to ask for a pause in the implementation of the punitive capital rules for digital assets and asked the regulator to review its previous decision that is currently holding back banks from participating in crypto.

The Basel Committee set the toughest capital requirements for crypto assets in 2021, when it set the 1,250% risk weight to digital assets. The supervisor cited market, credit, money laundering, terrorism and fraud as key risks.

The new rules are due to come into effect next year. The decision to include crypto assets in the riskiest possible bucket has acted as a huge barrier for banks as it makes participating in digital assets prohibitively expensive.

On August 19, a group of associations, including GFMA, ISDA and the FIA, jointly pleaded with the BCBS to pause the roll-out and to review its determination in light of evidence that blockchain technology is far less risky than previously believed. The letter also argued that “the uniquely conservative” treatment of crypto will lead to more risks than if banks were allowed to take part and act as stabilising forces. 

“In line with the ongoing monitoring of cryptoasset market developments by the BCBS, the Associations recommend that the BCBS pauses implementation of the Cryptoasset Standard ahead of its 2026 effective date and further consults on targeted revisions to the Cryptoasset Standard,” the letter said.

The associations asked the supervisor to “seek updated information concerning the use cases of distributed ledger technology” and to “consider any appropriate redesign and recalibration of the Cryptoasset Standard to account for recent and ongoing developments in global cryptoasset markets.”

Alongside the letter, the representative groups also published a report, which provides an update on the digital asset market and use cases for DLT, which have “greatly expanded” since the original decision to treat crypto as one of the riskiest assets on the planet.

“The Cryptoasset Standard’s restrictive qualification standards, combined with otherwise punitive market and credit risk capital treatments, effectively make it uneconomical for banks to meaningfully participate in the cryptoasset market,” the letter stated.

“We believe the natural result of the uniquely conservative treatment in the Cryptoasset Standard is the entrenchment of a bifurcated market structure in which a growing sector operates largely outside the banking sector—not because of its risk, but because of the design of the prudential bank regulatory framework,” the participants added.