BCBS Consults on Prudential Treatment of Cryptoasset Exposures

The proposed prudential treatment outlined in the consultation divides cryptoassets into two broad groups—Group 1 and Group 2 cryptoassets. Group 1 cryptoassets fulfil a set of classification conditions and are eligible for treatment under the existing Basel framework (with some modifications and additional guidance). These include tokenized traditional assets (Group 1a) and cryptoassets with effective stabilization mechanisms (Group 1b). Group 1 cryptoassets will be subject to the requirements set out in the Basel framework to determine their allocation between the banking book and trading book and to determine whether the exposures are treated according to standardized or internal model-based approaches. Group 2 cryptoassets are those, such as bitcoin, that do not fulfill the classification conditions. Since these pose additional and higher risks, they would be subject to a new conservative prudential treatment. The following are the key highlights of the proposed prudential treatment of these Group 1and 2 cryptoassets:

• Credit and market risk requirements. Group 1a of cryptoassets may be treated as equivalent to a traditional asset for the purpose of calculating minimum capital requirements for credit and market risks if they pose the same level of credit and market risks as traditional (non-tokenized) assets. In practice, this means bonds, loans, deposits and equities, commodities, and cash held in custody to be treated as equivalent. Cryptoassets under the category 1b must be redeemable for underlying traditional assets (for example, cash, bonds, commodities, equities). For Group 2 cryptoassets, new conservative prudential treatment based on a 1,250% risk-weight is applied to the maximum of long and short positions. The application of the 1,250% risk-weight will ensure that banks are required to hold risk-based capital at least equal in value to their Group 2 cryptoasset exposures.
• Other minimum requirements (leverage ratio, large exposures, liquidity ratios). At this stage, BCBS is not proposing to prescribe any new regulatory treatment for Group 1a, 1b, or Group 2 cryptoassets under the leverage ratio, large exposures framework, or liquidity ratio requirements. This means that, for leverage ratio, consistent with the leverage ratio standard, cryptoassets are included in the leverage ratio exposure measure according to their value for financial reporting purposes, based on applicable accounting treatment for exposures that have similar characteristics. For the cases where the cryptoasset exposure is an off-balance sheet item, the relevant credit conversion factor set out in the leverage ratio framework will apply in calculating the exposure measure. For large exposures purposes, the treatment for cryptoassets will follow the same principles as for other exposures. For the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) requirements, any Group 1 cryptoasset on the asset or liability side of the balance sheet of a bank must follow a treatment that considers the risks as set out in the LCR and NSFR standards.
• Supervisory review. Banks with direct or indirect exposures to any form of cryptoasset should ensure that risks not captured under the Basel framework (Pillar 1) are assessed, managed, and appropriately mitigated on an ongoing basis. These risks may include risks attributable to operational and cyber risk, risks attributable to the underlying technology, risks attributable to money laundering and financing of terrorism. To address additional credit risk and market risk characteristics of Group 1 cryptoassets that are not sufficiently captured in the capital treatment, supervisors should modify the Pillar 1 treatment to reflect an additional degree of conservatism for all banks. Potential modifications include prohibiting model-based approaches for all banks; requiring longer liquidity horizons to be used in the standardized and internal models approaches; requiring measurement of the basis risk in the market risk framework to account for potential differences between cryptoassets and equivalent traditional assets; and applying scalars to Pillar 1 requirements if features of the cryptoasset technology could increase the risk of non-payment or delayed payment relative to traditional assets.
• Disclosures. The disclosure requirements for bank exposures to cryptoassets or related activities should follow the general guiding principles for Pillar 3 disclosures of banks in the Basel framework. In accordance with the general guiding principles, banks must disclose information regarding any material Group 1a, 1b, and Group 2 cryptoasset exposures on a regular basis, including for each specific type of cryptoasset exposure information on the direct and indirect exposure amounts (including the gross long and short components of net exposures); the capital requirements; and the accounting classification. In addition, banks must include exposures to Group 1 cryptoassets in the relevant existing disclosure templates that apply to traditional assets (for example, for credit risk and market risk).

Related Links

• Press Release
• Consultation Paper (PDF)

Comment Due Date: September 10, 2021

Keywords: International, Banking, Securities, Cryptoassets, Cyber Risk, Operational Risk, Basel, Pillar 2, Pillar 3, Credit Risk,  Market Risk, Leverage Ratio, Large Exposures, Liquidity Risk, Supervisory Review, SREP, Risk Weighted Assets, Disclosures, Internal Model Approach, Standardized Approach, Regulatory Capital, BCBS