Basel Committee on Banking Supervision Initiates Consultation on Proposals for Treatment of Banks’ Digital Asset Exposures

The Basel Committee on Banking Supervision, the main international standard-setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters (with 45 members comprising central banks and bank supervisors from 28 jurisdictions), has initiated a public consultation on preliminary proposals for the prudential treatment of banks’ crypto-asset exposures.

Although banking institutions’ exposures to digital assets are presently quite limited, the ongoing growth and innovation in cryptocurrency, blockchain/DLT, and various other related services, along with the increased interest of certain banks, might increase financial stability concerns and risks to the traditional banking sector in the absence of prudential treatment.

Due to the rapidly-evolving nature of this nascent asset class, the Basel Committee thinks that appropriate policy development for crypto-asset exposures should involve more than just a single consultation.

This first public consultation, which comes after a discussion paper released in December 2019, will allow further research and related work to continue with the added benefit of incorporating meaningful feedback from external stakeholders.

The suggested prudential treatment specified in the consultation categorizes crypto-assets into two main groups:

  • Group 1 crypto-assets: these satisfy a set of classification requirements and as such are eligible for treatment under the current Basel Framework (with a few changes/modifications and additional guidance). These may include various tokenized traditional assets and stablecoins.
  • Group 2 crypto-assets: are those, like Bitcoin (BTC), which don’t satisfy the classification conditions. Since these assets may pose additional and greater risks, they may be subject to a new and more conservative prudential treatment.

According to the statement, central bank digital currencies or CBDCs do not fall within the scope of this particular consultation.

The Basel Committee says it is seeking feedback on the proposals, which may be submitted by September 10, 2021 where all submissions will be shared on the Bank for International Settlements (BIS) official website (unless a respondent actually requests confidential treatment on the consultation).

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