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Basel Committee on Banking Supervision Discussion paper on “Designing a Prudential Treatment for Crypto-Assets” and industry response

As exposure to crypto-assets is becoming more and more relevant to banks, the Basel Committee on Banking Supervision (Basel Committee) issued a timely discussion paper in December 2019 inviting an industry response on the topic of crypto-assets. The paper formed part of the Basel Committee’s broader plan to monitor market and regulatory developments revolving around crypto-assets in the banking system, the qualification of banks’ direct and indirect crypto-asset exposures through periodic data-collection exercises, and assessment of appropriate prudential treatment for banks’ exposures to crypto-assets.

In the paper, the Basel Committee called for industry responses in relation to the following topics:

1. A common understanding on the features and risk characteristics of crypto-assets that should be taken into consideration when designing prudential treatment for banks’ exposures to crypto-assets; and
2. General principles that should guide the design of prudential treatment by banks to their crypto-assets exposures.

The industry’s response was coordinated by the Global Financial Markets Association (GFMA) and was published in the GFMA’s response paper dated March 2020. Points of interest include:

1. Basel Committee: Definition of “crypto-asset” includes where the following features can be identified–digital/virtual nature, reliance on cryptography and use of distributed ledger technology.

GFMA’s response: there is no wide-spread agreement on the definition of “crypto-assets”, but the GFMA identified types of crypto-assets in its proposed approach to classification and understanding of crypto-assets in Annex A of the response paper.

2. Basel Committee: General principle of prudential treatment: “Same risk, same activity, same treatment”

GFMA’s response: Highly supportive of the above risk-based principle, but did not encourage an overly simplistic framework. GFMA thinks although there are unique risks associated with high risk crypto-assets, banks can leverage existing frameworks to tackle these risks, as seen in their proposed framework in Annex B of the response paper.

3. Basel Committee: Channels of bank exposures to crypto-assets and framework for identifying corresponding risk and prudential treatment: 

GFMA: the GFMA has made a list of potential channels of bank exposures to crypto-assets, with the corresponding assessment of whether the exposure is direct or indirect, overall risks related to banks’ exposure to the activity for determining the prudential treatment and recommended prudential treatment should banks engage in activity with “high risk” crypto-assets (see Annex B to the response paper).

Related Services and Sectors:

Banking and Finance, Insolvency and Restructuring

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