International Banking Committee Revises Crypto Asset Framework

The Basel Committee on Banking Supervision (BCBS) is looking to engage in further consultations to revise its crypto framework following responses from trade associations on earlier proposals published in June 2021.

The Basel Committee of banking regulators said on Nov 9 that it will address how banks should set aside capital to cover potential losses from crypto assets, following backlash that the policy made it prohibitive for banks to engage with crypto assets, because of the way it viewed the risks of non-stabilized digital currencies.

The backlash was from a group of trade associations who implored the BCBS to reconsider rules on investments in crypto in June 2021. Shortly after, the committee outlined its concerns that the growth of crypto and related services, coupled with the heightened interest of some banks, may cause an increase in global financial stability concerns without prudential treatment. 

The June proposal followed a December 2019 discussion paper, where it called for stakeholder views on the prudential treatment of crypto assets.

According to Moody’s Analytics, prudential treatment refers to credit and market risk requirements, other minimum requirements (leverage ratio, significant exposures, liquidity ratios), supervisory review, and disclosures.

The committee is starting from scratch following the response from trade associations. Committee members concurred on the need for “conservative” risk-based collection of capital requirements standards for digital assets. The committee will specify a revised prudential treatment, and will consider issuing a further consultative document by the second quarter of 2022.

Not enough specificity in risk profile for Group 2 crypto assets

The June 2021 rules saw crypto being categorized into two groups: cryptocurrencies eligible to be treated under a modified version of the existing Basel framework (Group 1), and others, like bitcoin which will be subject to conservative prudential treatment (Group 2). Group 1a cryptocurrency assets are tokenized traditional assets, and Group 1b refers to crypto-assets with stabilization (i.e. stablecoins).

These groupings meant that banks would need to have enough reserve capital to cover any losses in bitcoin, similar to banking capital rules on the riskiest investments. The proposals drew resistance from the Global Financial Markets Association, Financial Services Forum, the Futures Industry Association, the Institution of International Finance, and International Swaps and Derivatives Association, and the Chamber of Digitial Commerce.

Among the points of contention are that banks have incorporated new technology and mitigated risks by modifying existing frameworks rather than creating new ones. Also, Group 2 crypto asset classification was challenged on the grounds of granularity, not having enough specificity to address different risk profiles of various crypto assets, and that it went against established prudential framework principles.