Basel committee endorses global standards for banks’ investment in cryptoassets

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(Kitco News) –  The Basel Committee on Banking Supervision (BCBS), an international committee formed by the Bank of International Settlements (BIS) to develop standards for banking regulation, met on Dec. 16 and formally endorsed a set of global standards for how banks should deal with cryptoassets. The new standards are set to be implemented by January 1, 2025.

The Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), was charged with endorsing the standards along with the Committee’s work program and strategic priorities for 2023-24.

According to the press release announcing the endorsement, “the program prioritizes work on emerging risks and vulnerabilities, digitalization, climate-related financial risks and Basel III implementation.”

A report released by the committee indicates that banks will have a two percent limit on exposure to certain crypto assets – labeled Group 2 assets – with a recommendation that it should generally be lower than one percent. Assets that fall into this category include non-fungible tokens (NFTs), stablecoins and unbacked crypto assets that don’t meet classification conditions.

Group 1 assets, which include tokenized traditional assets and cryptoassets with effective stabilization mechanisms, have been given an exposure limit of 2.5% and “are subject to capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework.”

The classification conditions designed by the Committee also require cryptoassets with stabilization mechanisms to pass a redemption risk test. “The objective of the redemption risk test is to ensure that the reserve assets are sufficient to enable the cryptoassets to be redeemable at all times, including during periods of extreme stress, for the amount to which the cryptoasset is pegged (the “peg value”),” the report said.

These new standards “will provide a robust and prudent global regulatory framework for internationally active banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability,” the release said.

The global banking system’s direct exposure to cryptoassets is still relatively low, but the events of 2022 have highlighted the importance of having “a strong global minimum prudential framework for internationally active banks” to manage the risks posed by digital assets .

For this reason, the GHOS has tasked the BCBS with assessing bank-related developments in the cryptoasset market, which includes the role of banks as stablecoin issuers and custodians of crypto assets. The Committee will also collaborate with other standard-setting bodies and the Financial Stability Board to ensure a consistent global regulatory treatment of stablecoins.

“Today’s endorsement by the GHOS marks an important milestone in developing a global regulatory baseline for mitigating risks to banks from cryptoassets,” said Tiff Macklem, Chair of the GHOS and Governor of the Bank of Canada. “It is important to continue to monitor bank-related developments in cryptoasset markets. We remain ready to act further if necessary.”

The new crypto standards laid out by the committee will be added to the consolidated Basel Framework shortly, and their application will be up to each individual jurisdiction.

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