The Basel Committee on Banking Supervision (BCBS) has issued a statement on “crypto-assets” indicating their concern that new financial products related to crypto have the potential to increase the risks to banks who engage in digital or crypto assets. The BCBS was established by central bank governors to cooperate on regulatory and supervisory matters. The BCBS seeks to set a consistent standard amongst member banks which include the largest economies in the world such as the US, China, the UK, Germany and more.
The BCBS notes that the crypto market remains relatively small but cautions on the risk associated with both cryptocurrency trading platforms and digital assets. Crypto is both “immature” and highly volatile, according to the BCBS. This presents increases risk for financial institutions such as liquidity risk, credit risk, fraud, money laundering, legal and reputational risk. The BCBS differentiates between crypto and central bank digital currencies (CBDCs)
The BCBS states:
“… the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto-assets are not legal tender, and are not backed by any government or public authority. Through this newsletter, the Basel Committee is setting out its prudential expectations related to banks’ exposures to crypto-assets and related services, for those jurisdictions that do not prohibit such exposures and services.”
The BCBS says that it continues to monitor developments in crypto and will in due course “clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets.” The Commission is coordinating its work with othstandard-settingrd setting bodies and the Financial Stability Board.
The BCBS advises that it expects banks with exposure to crypto-asset the following minimum standard should be adopted:
- Due diligence: Before acquiring exposures to crypto-assets or providing related services, a bank should conduct comprehensive analyses of the risks noted above. The bank should ensure that it has the relevant and requisite technical expertise to adequately assess the risks stemming from crypto-assets.
- Governance and risk management: The bank should have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services. Given the anonymity and limited regulatory oversight of many crypto-assets, a bank’s risk management framework for crypto-assets should be fully integrated into the overall risk management processes, including those related to anti-money laundering and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring. Given the risk associated with such exposures and services, banks are expected to implement risk management processes that are consistent with the high degree of risk of crypto-assets. Its relevant senior management functions are expected to be involved in overseeing the risk assessment framework. Board and senior management should be provided with timely and relevant information related to the bank’s crypto-asset risk profile. An assessment of the risks described above related to direct and indirect crypto-asset exposures and other services should be incorporated into the bank’s internal capital and liquidity adequacy assessment processes.
Disclosure: A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.
Supervisory dialogue: The bank should inform its supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks.