P Xenos and M Bacina
Basel Committee calls for prudent rules for crypto
Global banking regulator Basel Committee on Banking Supervision (BCBS) has called for a conservative prudential treatment framework for crypto assets.
The Basel Committee, which includes banking regulators from the United States, Europe and Japan, has published its report on the prudential treatment of crypto assets.
The report publishes some suggestions for dealing with cryptocurrencies and digital currencies, and are set to become the new standard by March 2020.
The report refers to digital assets as an immature asset class, stating that:
Certain crypto-assets have exhibited a high degree of volatility, and present risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks.
Furthermore, the BCBS expresses the idea that, if authorized, banks that decide to acquire crypto assets or provide related services should use prudence, especially for high-risk tokens. The document also specifies that exposure to cryptocurrency can be direct when the bank holds the assets or indirect when, for instance, the bank owns crypto derivatives.
The Basel Committee recommends that crypto assets should not be accepted for the purposes of credit risk mitigation collateral, treated as high-quality liquid assets for liquidity coverage ratio or used for net stable funding ratio calculations.
Further, the report states that crypto assets held in a bank's trading book should be subject to a full deduction for market risk and credit valuation. The paper reads:
This treatment reflects the high degree of uncertainty about the positive realisable value of crypto-assets in times of stress.
The paper specifies that central bank digital currencies are outside the report's scope and that stablecoins “warrant further assessment and elaboration before specifying a prudential treatment.”