Shearman & Sterling LLP | FinReg | Basel Committee on Banking Supervision Consults on Prudential Treatment of Crypto-Assets
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  • Basel Committee on Banking Supervision Consults on Prudential Treatment of Crypto-Assets

    The Basel Committee on Banking Supervision has published a discussion paper seeking the views of stakeholders on the prudential regulatory treatment of crypto-assets. The paper is relevant for academics, banks, central banks, finance ministries, market participants, payment system operators and providers, supervisory authorities and technology companies. Responses should be submitted by March 13, 2020.

    The Basel Committee believes that crypto-assets have the potential to pose risks to financial stability and authorized banks should therefore apply a prudential treatment to the crypto-asset exposures they hold. It proposes that a potential prudential regime should be guided by a set of general principles that state: (i) where crypto-assets are equivalent in their economic functions to “traditional” assets, they should be treated in the same way for prudential purposes; (ii) the prudential treatment of crypto-assets should be simple and flexible and, where appropriate, should build on the existing regulatory framework; and (iii) any prudential treatment the Basel Committee does develop for crypto-assets should constitute a minimum standard that jurisdictions would be free to make more conservative if appropriate.

    The report goes on to propose the key channels through which banks may be exposed to crypto-assets, including issuance or ownership of crypto-assets and lending or taking crypto-assets as collateral, and outlines the major risks of crypto-assets, which include liquidity, market and credit and counterparty credit risk. The discussion paper then sets out an example of the capital and liquidity requirements that could be imposed for “high-risk” crypto-assets (i.e. digital assets recorded on a distributed ledger technology platform that are secured cryptographically, are not issued by a jurisdictional authority or other identified issuer, have no intrinsic value or are not linked to assets with intrinsic values and do not give rise to a contract between the holder and another identified issuer). Under the Basel Committee’s proposals, outright or direct holdings of such crypto-assets would be allocated to the banking book and subject to a full deduction from Common Equity Tier 1 capital, while indirect exposures would be allocated to the trading book and subject to the equivalent of a full deduction treatment for market risk and credit valuation adjustment. These crypto-assets would not be eligible as either financial collateral for credit risk mitigation or as high-quality liquid assets for the purpose of the Liquidity Coverage Ratio or Net Stable Funding Ratio. The Basel Committee also seeks input on whether crypto-assets that are not deemed to be “high-risk” should be subject to a different prudential treatment.

    Responses to the consultation will help to inform the Basel Committee’s development of a prudential regime for crypto-assets. Any prudential treatment the Basel Committee does propose will be the subject of a separate consultation paper.

    View the Basel Committee's discussion paper.

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