IN Basel Committee on Banking Supervision (BCBS) has released a proposal to limit banks’ exposure to cryptoassets by applying new credit and market risk requirements.
“Crypto assets raise a lot of concerns, especially with regard to consumer protection, money laundering and terrorist financing, and their carbon footprint,” says the document, which provides an overview of how traditional finance views crypto assets. He also said that BCBS “took steps to address these risks.”
The committee said the rise in cryptoassets and related services could potentially “raise concerns about financial stability and increase the risks faced by banks.”
In addition, he added that some cryptocurrencies have shown a “high degree of volatility” and that they can pose risks for banks as their exposure increases, in particular: liquidity, credit, market risks, money laundering / terrorist financing, legal, as well also operational risks such as fraud and cyber risks.
With this in mind, BCBS is proposing new prudential requirements for two groups of cryptoassets:
- for traditional tokenized assets, capital requirements should be at least equivalent to those applied to traditional assets, and for stablecoins, new guidance should be published on the application of current rules to minimize risks associated with stabilization mechanisms;
- for cryptoassets that do not qualify as traditional tokenized assets, such as bitcoins (BTC) and other cryptocurrencies, the committee proposes to apply “prudent handling” based on a 1250% risk weight applied to the maximum long and short positions of banks.
This latter group of cryptocurrencies presents “additional and higher risks compared to group 1”, therefore, according to the proposal, it should be “subjected to such treatment.”
In practice, this means that banks will have to increase their capital reserves, for example, to invest in derivative cryptoassets such as ETFs that track the price of bitcoins.
It remains to be seen how this proposal, which could be significantly modified prior to its implementation, will affect the plans of a number of banks that are preparing to increase their impact on cryptocurrencies.
Among them a British bank Standard charter recently announced a partnership with a digital asset investment holding company. BC Group open a digital asset brokerage and conversion platform for institutional and corporate clients in the UK and Europe in the fourth quarter of 2021.
The committee said in a statement that it expects comments on its proposal by September 10th.
“Given the evolving nature of this asset class, the committee believes that developing policies to impact cryptoassets is likely to be an iterative process involving more than one consultation,” they said.
BCBS acts under the guise Bank for International Settlements (BIS), which is jointly owned by 62 central banks around the world, representing countries that collectively account for about 95% of the world’s gross domestic product (GDP).
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