BIS Looks For ‘Prudential’ Crypto Rules

The Basel Committee has said in a paper that a “prudential” regulatory framework should be constructed by stakeholders in a bid to address concerns over risks to the financial system.

In a paper titled “Designing a Prudential Treatment for Cryptoassets,” the Basel Committee on Banking Supervision said that “while the crypto-asset market remains small relative to the size of the global financial system, and banks’ exposures to crypto-assets are currently limited, its absolute size is meaningful, and there continues to be rapid developments with increased attention from a broad range of stakeholders.”

And as crypto assets gain traction, said the BIS, there is the potential for financial stability concerns and increased risks faced by banks – and those risks, specifically, are tied to liquidity, credit and operational risk (via fraud).

The committee, which is comprised of regulators from the United Kingdom, the United States and other countries, has said that cryptos “do not reliably provide the standard functions of money, and can be unsafe to rely on as a medium of exchange or store of value.”

The risks of stablecoins, according to the paper, have yet to be tested fully.

The paper did not address the potential impacts of various countries issuing digital currency.

And in considering the appropriate prudential regulatory treatment of crypto assets – which address risk and capital needs – such an endeavor has a “natural starting point” of defining what such assets are – and are not. As the BIS said, “there is no single or generally recognized definition of crypto-assets at present.”

“If banks are authorized, and decide, to acquire crypto-assets or provide related services, the Committee is of the view that they should apply a conservative prudential treatment to such exposures, especially for high-risk crypto-assets,” according to the BIS.

Drilling down into the paper, the BIS noted that crypto holdings and exposure could be direct or indirect (tied to derivatives, for example), and that liquidity rules could conceivably be applied to those holdings.

The BIS also said that cryptos should be accounted for as a “full deduction: from Common Equity Tier 1 capital, commonly represented by common shares held by a bank” (and which we at PYMNTS note can be re-adjusted as necessary).

Overall, according to the paper, the design for the prudential treatment needs to be flexible and would represent a “minimum” framework for banks to follow.

In determining the risks, according to the paper, there should be consideration of which individuals or entities have a legal claim on crypto assets, how they are created, who uses them and whether there is transparency in the markets through which they are traded.

The call for comments, which will last into March of 2020, and the nod for a prudential framework itself, comes after a warning earlier in the year from the BIS – echoing sentiments from the December call for comments – that “the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.”