Basel Committee Consults on Crypto Regulation

The Basel Committee on Banking Supervision has started a consultation process on the regulatory treatment of crypto assets by publishing a discussion paper on the design of a prudential treatment of these assets.

The committee says the past few years have seen rapid growth in crypto-assets, and that while the market is still small relative to the size of the global financial system, and banks’ exposures to crypto-assets are currently limited, the absolute size of the market is “meaningful” and there continue to be rapid developments, with increased attention from a broad range of stakeholders.

The Basel Committee has previously stated its view that the growth of crypto-assets and related services has the potential to raise financial stability concerns and increase risks faced by banks. It says crypto-assets are an immature asset class given the lack of standardisation and constant evolution and certain assets have exhibited a high degree of volatility. As such the Basel Committee says they present risks for banks, including liquidity, credit, market, operational (including fraud and cyber), money laundering and terrorist financing, and legal and reputation risks. “If banks are authorised, and decide, to acquire crypto-assets or provide related services, the Committee is of the view that they should apply a conservative prudential treatment to such exposures, especially for high-risk crypto-assets,” it states.

The discussion paper seeks the views of stakeholders on a range of issues related to the prudential regulatory treatment of crypto-assets, including the features and risk characteristics of crypto-assets that should inform the design of a prudential treatment for banks’ crypto-asset exposures; and general principles and considerations to guide the design of a prudential treatment of banks’ exposures to crypto-assets, including an illustrative example of potential capital and liquidity requirements for exposures to high-risk crypto-assets.

Should the Committee decide to specify a prudential treatment of crypto-assets, it says it will issue a consultation paper detailing its proposals and seek further input from stakeholders. Any specified treatment 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 currently prohibit their banks from having any exposures to crypto-assets would be deemed compliant with any potential global prudential standard.

The committee stresses that the discussion paper should not be interpreted as an endorsement or support for any specific existing or planned crypto-asset. Comments are invited before March 13 2020.

Colin Lambert

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