Basel Committee Prudential Treatment Proposals for Crypto Assets Receive Detailed Responses

The comment period for the “Second Consultation on the Prudential Treatment of Crypto Asset Exposures” of the Basel Committee on Banking Supervision (BCBS), a document published in June 2022, has ended.

The international financial associations had much to say in response to it. Several did so at once in a joint 84-page comment letter published on October 4. In addition, there were some lone voices, although they did not differ significantly in their content from the conclusions formulated by joint associations.

All the commenters had the same basic message. The director of regulatory affairs at the Institute of International Finance (IIF), Richard Gray, speaking on behalf of the joint ventures working group that participated in the response letter, summed up the response when he told Cointelegraph in a statement:

“Banks are already experts in risk management and consumer protection.”

Certain features and calibrations of the Second Inquiry, according to the written response, “would significantly reduce the ability of banks – and in some cases effectively prevent banks – from using the benefits of distributed ledger technology (DLT) to perform certain functions. traditional banking, financial intermediation and other financial functions more efficiently.

The Iterative Approach to Reserve Requirements

The Second Inquiry is named in relation to a document published in June 2021 called “Prudential treatment of exposures to crypto assets”, which in turn was based on a 2019 document and responses to it. In the 2021 document, the Basel Committee on Banking Supervision divided crypto assets into groups and recommended a different prudential treatment for each group.

Group 1 of the committee’s proposal consists of crypto assets that may be subject to risk-based capital requirements at least equivalent to those of the Basel Framework. Group 1a consists of “digital representations of traditional assets that use cryptography, distributed ledger technology (DLT), or similar technology instead of registering ownership through a central securities depository (CSD)/custodian account.” Group 1b consists of stablecoins and has “new guidance on the application of current rules to capture risks related to stabilization mechanisms.”

Group 2 crypto assets were those that did not meet any of the classification conditions. That included cryptocurrency. Those assets would be “subject to a new conservative capital treatment.” The most prominent new treatment was the 1,250% risk weight assigned to them, which required banks to hold capital equivalent in value to their cryptocurrency exposure in this class.

A BCBS document, recently published and undated, estimated banks’ exposure to crypto assets at the end of 2021 at €9.4 billion, or 0.14% of the total exposure of banks reporting their crypto holdings. That figure drops to 0.01% as the exposure to crypto assets of all supervised banks. Bitcoin (BTC) and ether (ETH) accounted for nearly 90% of that exposure.

Second iteration of prudential treatment

After considering comments on the 2021 document, the BCBS made several changes to its proposals. Among them, the creation of a Group 2a of crypto assets that will be subject to modified market risk rules to meet the requirements for recognition of coverage. Exposure to Group 2 crypto assets is also capped at 1% of Tier 1 capital. A new, more liberal, “narrow pass” category was created for stablecoins, and Group 1 crypto assets became subject to an add-on of infrastructure risk to risk-weighted assets.

The joint partnership working group that responded to the second consultation differs slightly from those that participated in the response to the first. The new group included the Global Financial Markets Association, the Futures Industry Association, the IIF, the International Swaps and Derivatives Association, the International Securities Lending Association, the Bank Policy Institute, the International Capital Markets Association, and the Financial Services Forum.

The authors of the response letter noted that viable prudential treatment of crypto assets is necessary for banks to engage in the crypto sector, and without that, “unregulated or less regulated entities are likely to be the predominant providers.” of services related to crypto assets”. The letter continued with the proposals of the BCBS, responding from the point of view of the viability of the banks.

IIF’s Gray told Cointelegraph:

“We support a regulatory framework for crypto assets that is appropriately conservative, but not so restrictive as to effectively shut out banks. It is important for financial stability that regulated financial institutions are able to facilitate customer activity in the cryptocurrency space. cryptocurrencies”.

In addition to technical issues, such as determining acceptable Tier 1 exposure to Group 2 crypto assets, the letter drew attention to areas where the scope of the proposed framework was unclear. The Japan Bankers Association express similar concerns in your response to the second query. Senior Vice President and Policy Advisor of the American Bankers Association, Hu Benton, wrote also a technically detailed evaluation of the proposed standards.

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Basel Committee Prudential Treatment Proposals for Crypto Assets Receive Detailed Responses