10 Jun BCBS – Consults on prudential treatment of Crypto asset exposures
June 10, 2021
While banks’ exposures are currently limited, growth and innovation in crypto assets, coupled with heightened interest, could increase financial stability concerns and risks. Given the rapidly evolving nature of this asset class, BCBS believes that policy development for crypto-asset 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. The proposed prudential treatment outlined, divides crypto assets into 2 broad groups.
Group 1 Stable Assets
These fulfil a set of classification conditions and as such are eligible for treatment under existing Basel Framework (with some modifications and additional guidance). Group 1 assets include certain tokenized traditional assets, as well as stable coins. Capital at least equivalent to those of traditional assets and consider capital add-ons.
Group 2 Riskier Assets
These include crypto assets such as bitcoin, that do not fulfill the classification conditions. Since they pose higher risks, would be subject to conservative prudential treatment. New treatment of 1250% risk weight applied to a maximum of long and short positions. Central Bank Digital Currencies (CBDCs) are not within the scope of the consultation.
Treatment set out in this paper has been guided by the following general principles. Same Risk, Same Activity, Same Treatment. A cryptoasset that provides equivalent economic functions and poses same risks as a traditional asset should be subject to the same capital, liquidity, and other requirements. The framework should apply the concept of technology neutrality, and not be designed in a way to explicitly advocate or discourage the use of technologies related to crypto assets. Account for additional risks arising from cryptoasset exposures vs. traditional assets.
Design should be simple because crypto assets are still 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 be revisited.
Any prudential treatment would constitute a minimum standard for international banks. Jurisdictions would be free to apply additional and/or more conservative measures. As such, jurisdictions that prohibit their banks from having any exposures to crypto-assets would be deemed compliant with a global prudential standard.
Other minimum requirements, (leverage ratio, large exposure, liquidity ratio), applied under existing Basel Framework requirements with additional guidance as applicable.
Supervisory review, guidance to ensure that risks not captured in minimum (Pillar 1) requirements are assessed, managed, and mitigated (including with capital add-ons). Require to disclose of information re crypto asset exposures on a regular basis.
Comments on the proposals welcomed by September 10, 2021, responses will be published.
For more information, visit www.bis.org.