Banks holding bitcoin will have to set aside capital to back the full amount of their cryptoasset exposure, under guidelines proposed today by the Basel Committee for Banking Supervision (BCBS).
The BCBS, which is hosted by the Bank for International Settlements, is the primary global standard setter for the prudential regulation of banks.
In a new consultation paper published today, the BCBS said banks should capitalise long or short exposures to cryptoassets like bitcoin to the extent that a full write-off of exposures would not expose depositors and other senior creditors of the banks to a loss.
“The Committee is of the view that the growth of cryptoassets and related services has the potential to raise financial stability concerns and increase risks faced by banks,” the BCBS said in the paper.
“Certain cryptoassets have exhibited a high degree of volatility and could present risks for banks as exposures increase”
“Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase, including liquidity risk, credit risk, market risk, operational risk (including fraud and cyber risks), money laundering/terrorist financing risk, and legal and reputation risks,” the BCBS said.
While banks will have to capitalise their exposures to cryptoassets like bitcoin in full, other cryptoassets will face a different approach.
Tokenised forms of traditional assets like equity or property, as well as stablecoins, should be subject to the equivalent capital treatment as the underlying assets, the BCBS said.
Stablecoins are digital versions of existing fiat currency, such as the US dollar.
“A cryptoasset that provides equivalent economic functions and poses the same risks compared with a traditional asset should be subject to the same capital, liquidity and other requirements as the traditional asset,” the BCBS said.
“The prudential framework should apply the concept of technology neutrality”
The Basel Committee said it was not seeking to discourage the use of cryptoassets per se.
“As a starting point, the prudential framework should apply the concept of technology neutrality and not be designed in a way to explicitly advocate or discourage the use of specific technologies related to cryptoassets. The prudential treatment should, however, account for any additional risks arising from cryptoasset exposures relative to traditional assets.”
However, the BCBS said, the capital charges faced by banks for owning stablecoins may have to rise if the stabilisation mechanism fails to work as intended.
In its consultation paper, the BCBS said the onus would be on banks to check that stablecoins were tracking their underlying asset effectively.
“Banks must have a monitoring framework in place verifying that the stabilisation mechanism is functioning as intended,” the BCBS said.
“To this end, banks must monitor daily the difference between the value of the cryptoasset and the underlying traditional asset(s) to assess the effectiveness of the stabilisation mechanism.”
“The difference in value must not exceed 10 basis points of the value of the underlying traditional asset more than three times over a one-year period,” the BCBS said.
“Banks must monitor daily the difference between the value of the cryptoasset and the underlying traditional asset”
In the past, privately issued stablecoins like Tether have shown much wider divergences from their dollar peg.
“Banks must also verify the ownership rights of any underlying traditional asset from which the stable value of the cryptoasset is dependent upon,” the BCBS said.
Currently, the reserve backing of many privately issued stablecoins, such as Tether and Circle, is unclear.
The BCBS said its proposed new rules for cryptoassets would constitute a minimum standard for internationally active banks.
The Basel Committee is inviting comments on the new cryptoasset standards by September 10 2021. It said it expects further consultations to follow.
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