Industry Associations Call for Basel Crypto Proposal Change
Posted by Colin Lambert. Last updated: September 22, 2021
Six financial industry associations have called upon the Basel Committee to remove “material impediments” to bank involvement in cryptoasset markets, arguing the proposed capital rules are too stringent. Under the proposed rules, banks would have to allocate capital at 100% of their cryptoasset exposures, much higher than in traditional asset classes.
The Global Financial Markets Association, the Financial Services Forum, the Futures Industry Association, the Institute of International Finance, the International Swaps and Derivatives Association and the Chamber of Digital Commerce have submitted a joint response to the Basel Committee’s consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
In the response, the associations highlight the need for prudential regulatory certainty in the near to medium term, “particularly given the pace of evolution and client demand for cryptoassets”.
They acknowledge the committee’s observation that banks’ exposures in crypto are currently limited, in spite of the growth in the asset class, however they argue this limited exposure is “neither desirable not sustainable” because it would limit banks’ access to the underlying technology, which “holds promise to make it possible to deliver financial services more quickly, securely and at lower cost” with the added effect of mitigating counterparty, liquidity and settlement risk.
Noting the potential technology benefits across payments, the provision of financing, trade processing and other capital markets activities, the associations argue that type of economic efficiency would lead to tangible benefits for the real economy, adding it is critical, from a public policy perspective, that these benefits are able to be delivered by financial institutions within the regulatory perimeter.
“These efficiencies should be able to be realised across various products and services, including through the use of cryptoassets, albeit with the same safety and soundness tools that the Basel Committee has instilled in the current capital and liquidity framework,” the response states.
The associations also argue the public and the regulatory community would benefit from bank involvement in the cryptoasset space because of the industry’s “long history of identifying, monitoring and managing risks from both a prudential and conduct perspective on an ongoing basis”.
Noting certain elements of the proposed prudential framework would make bank involvement in the cryptoasset market cost-prohibitive from a capital perspective, the associations point out that other elements, such as operational requirements for tokenised assets, are unlikely to be able to be satisfied in practice. “This approach is especially concerning given the rapid growth of cryptoasset-related market activity with participants that fall outside the perimeter of prudential and market regulations,” they state, adding their proposed changes “would not dilute the proposal’s conservatism as it relates to the prudential treatment of lesser-known, more volatile cryptoassets…but rather would facilitate a safer and more sound avenue by which the benefits of cryptoassets can be accessed by society.”
The consultation should be revised to help realise the benefits that DLT can deliver across the real economy, to facilitate regulated bank involvement in cryptoasset markets and to provide an appropriately regulated and level playing field across the globe
The associations say they agree with the Basel Committee that the approach should follow the principle of “same risk, same activity, same treatment” and that the prudential framework should be technology neutral, howeveradjustments are needed to achieve true technological neutrality.
They also argue the framework should be as simple as possible; however, there are some aspects of the proposal that should be further simplified, while other aspects should be made more risk sensitive. Additionally, given the cross-border nature of the cryptoasset markets, the Associations support having minimum global standards, supported by coordination across jurisdictions to help ensure an approach that is consistent and comparable.
“The Associations believe that making greater use of the existing international prudential framework (i.e., Basel III) is the best way to achieve such principles,” the response states. “For example, using the existing international prudential framework should help: (1) enable a consistent application across jurisdictions of “same risk, same activity, same treatment”;
(2) leverage a framework that is designed to be product agnostic and, therefore, avoid added complexity through the introduction of new methodologies; and (3) support existing established principles of separately capitalizing banking and trading book risks. This approach also would mitigate unwelcome regulatory fragmentation, as well as limit the prospect of risk concentrating outside a regulatory perimeter.
“In sum,” the response concludes. “The Associations believe that the consultation should be revised to help realise the benefits that DLT can deliver across the real economy, to facilitate regulated bank involvement in cryptoasset markets and to provide an appropriately regulated and level playing field across the globe (through use of the existing prudential framework).”