The Basel Committee’s proposal for the proper treatment of crypto-assets receives detailed answers
The comment period has ended for the Basel Committee on Banking Supervision (BCBS) “Second consultation on prudent management of exposures to crypto-assets”, a document published in June 2022.
International financial associations had much to say in response, and several did so at once in a joint 84-page comment letter released on 4 October. In addition, there were some lonely voices, although they did not differ significantly in content from the conclusions the joint associations have made.
All the commentators had the same basic message. Richard Gray, director of regulatory affairs at the Institute of International Finance (IIF), spoke on behalf of the joint association’s working group that participated in the response letter and summarized the response when he told Cointelegraph in a statement:
“Banks are already experts in risk management and consumer protection.”
Some features and calibrations in the second consultation, according to the written response, “would meaningfully reduce the ability of banks to – and in some cases effectively exclude banks from – leveraging the benefits of distributed ledger technology (‘DLT’) to perform certain traditional banking, financial intermediation and other financial functions more efficiently.”
The iterative approach to reserve requirements
The second consultation is named in relation to a document published in June 2021 called “Prudential Treatment of Cryptoasset Exposures”, which itself was built on a 2019 document and the responses to it. In the 2021 document, the Basel Committee on Banking Supervision divided cryptoassets into groups and recommended different prudential treatments for each group.
Group 1 in the committee’s proposal consisted of crypto-assets that may be subject to at least equivalent risk-based capital requirements under the Basel framework. Group 1a consists of “digital representations of traditional assets using cryptography, Distributed Ledger Technology (DLT) or similar technology instead of recording ownership through the account of a central securities depository (CSD)/custodian bank.” Group 1b consists of stablecoins and has “new guidance on [the] application of applicable rules to capture the risks associated with stabilization mechanisms.”
Group 2 cryptoassets were those that did not meet any of several classification conditions. That included cryptocurrency. These assets will be “subject to a newly prescribed conservative capital treatment.” The most prominent new treatment was the 1,250% risk weight assigned to them, which required banks to hold capital commensurate with their exposure to crypto in this class.
Related: Digital currency commentators at US central bank divided on benefits, gathered in confusion
A recently released, undated BCBS document estimates bank exposure to crypto assets at the end of 2021 at €9.4 billion ($9.32 billion), or 0.14% of the total exposure of banks reporting crypto holdings. This number drops to 0.01% as the crypto asset exposure of all banks is monitored. Bitcoin (BTC) and Ether (ETH) accounted for nearly 90% of this exposure.
The second iteration of the precautionary treatment
After considering the comments on the 2021 paper, BCBS made several changes to its proposals. These included the creation of a group 2a of cryptoassets that will be subject to amended market risk rules to meet the requirements for hedge approval. Group 2 exposure to crypto assets is also limited to 1% of Tier 1 capital. A new, more liberal “soon to pass” category was created for stablecoins, and Group 1 crypto-assets were subject to an infrastructure risk surcharge to risk-weighted assets.
The joint working group that responded to the second consultation differed slightly from those involved in the response to the first. The new lineup included the umbrella group Global Financial Markets Association, Futures Industry Association, IIF, International Swaps and Derivatives Association, International Securities Lending Association, Bank Policy Institute, International Capital Markets Association and Financial Services Forum.
The authors of the response letter noted that a workable supervisory treatment of cryptoassets is necessary for banks to engage in the cryptosector, and without it, “U- and – less regulated entities are likely to be [the] dominant providers of crypto-asset-related services.” The letter went on to engage closely with the BCBS proposals, responding from the point of view of the banks’ feasibility.
IIF’s Gray told Cointelegraph:
“We support a regulatory framework for cryptoassets that is appropriately conservative, but not so restrictive that it will effectively shut down bank involvement. It is important for financial stability that regulated financial institutions are able to facilitate client activity in the crypto space.”
Besides technical issues such as determining an acceptable Tier 1 exposure to Tier 2 cryptoassets, the letter drew attention to areas where the scope of the proposed framework was unclear. The Japan Banking Association expressed similar concerns in its response to the second consultation. American Bankers Association senior vice president and policy advisor Hu Benton also wrote a technically detailed assessment of the proposed rules.
