Recent proposals on prudential treatment of crypto-assets
Updated: Oct 4, 2021
The Basel Committee on Banking Supervision of the Bank of International Settlements (BIS) recently released a Consultative Document on the Prudential treatment of crypto asset exposures. This Consultative Document sets out proposed capital requirements for banks holding crypto assets on their balance sheets.
The proposal splits crypto assets into two kinds, Group 1 and Group 2.
Group 1 crypto assets are tokenised traditional assets and crypto assets with effective stabilisation mechanism (stablecoins).
Group 2 crypto assets include all other crypto assets that are not Group 1 crypto assets, and would include, for example, cryptocurrencies without an issuer, such as Bitcoin.
We agree with Caitlin Long in her recent Forbes article that:
The proposal treats stablecoins prudently, rightly suggesting they can more or less fit into the existing Basel framework.
We also agree with her position that the proposed treatment of Group 2 crypto assets is not appropriate.
In our view banks should not be holding risk-based capital in line with the proposed formula. Activities undertaken by the banks should be ring-fenced and not integrated with its other assets.
If a bank holds $1 million of Bitcoin, the custody of Bitcoin should be treated separately, as if the cryptocurrency is a commodity. We make this recommendation as cryptocurrencies, such as Bitcoin, have been considered similar to a commodity by ASIC and other regulators.
In its submission to the Senate Inquiry into Digital Currency in December 2014, ASIC stated:
ASIC... considers that digital currencies are not a currency or money for the purposes of the Corporations Act. Digital currencies such as bitcoins are more akin to a commodity.
In ASIC's recent Consultation Paper 343: Crypto-assets as underlying assets for ETPs and other investment products, ASIC also describes crypto assets as having similar features to commodities.
Whether and what APRA, other prudential regulators or prudentially regulated entities make submissions to this Consultative Document will be something to follow over the next few months. In the longer term, APRA's prudential regulation of crypto assets may follow from more settled BIS guidance.