Basel Committee release report on the regulation of crypto assets

Basel Committee on Banking Supervision (BCBS), a global banking regulator, has recently published a report on the prudent regulation of crypto assets. The Basel Committee is made up of regulators from the US, Europe and Japan. In the report, the regulator states that cryptocurrencies pose considerable risks and its usage can harm financial stability. The report also claims that cryptocurrencies can increase the risks faced by banks.

 The report reads:

Crypto-assets are an immature asset class given the lack of standardization and constant evolution. Certain crypto-assets have exhibited a high degree of volatility, and present risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks.

BCBS also states that, if approved, banks that choose to acquire crypto-assets or provide related services should utilize prudence, particularly for high-risk tokens. Likewise, the report indicates that exposure to cryptocurrency can be direct when the bank holds the assets or indirect when the bank owns crypto derivatives.

As per the Basel Committee, crypto-assets should not be acknowledged as credit risk mitigation collateral, high-quality liquid assets for liquidity coverage ratio or net stable funding ratio. The regulator claims that the crypto-assets that are held in the trading book must be subject to a full deduction for market risk and credit valuation.

This treatment reflects the high degree of uncertainty about the positive realizable value of crypto-assets in times of stress.

The paper states that central bank digital currencies are outside its degree and that stablecoins “warrant further assessment and elaboration before specifying a prudential treatment.”