The Basel Committee on Banking Supervision (BCBS) launched a second consultation on the prudential treatment of cryptoasset exposures of banks, with the comment period ending on September 30, 2022.
The first consultation was issued in June 2021. This second consultation maintains the basic structure of the proposal in the first consultation, with cryptoassets divided into two broad groups: Group 1 includes crytpoassets eligible for treatment under the existing Basel framework with some modifications while Group 2 includes unbacked cryptoassets and stablecoins with ineffective stabilization mechanisms, which are subject to a new conservative prudential treatment. However, the updated proposals provide more detail on the proposed standard and include new elements such as an infrastructure risk add-on to cover the new and evolving risks of distributed ledger technologies, adjustments to increase risk sensitivity, and an overall gross limit on Group 2 cryptoassets. Below are the key changes in the second consultation:
- The development of the specific standards text for inclusion in the Basel framework in the form of a new chapter (SCO60) on Cryptoasset Exposures
- Elaboration and refinement of the classification conditions, with a revised stabilization test for Group 1b (stablecoins)
- The introduction of an add-on to risk-weighted assets to cover infrastructure risk for all Group 1 cryptoassets
- Potentially subjecting the Group 2 cryptoassets that meet a set of hedging recognition criteria (that is, Group 2a) to modified versions of the market risk requirements, which permit a limited degree of hedge recognition in the calculation of a bank’s net exposure
- Delinking the capital requirements that will apply to cryptoassets from their classification as tangible or intangible assets under the accounting standards
- Clarification on the delineation between risks that would be covered by the operational risk framework and the risks that should instead be captured in the credit and market risk frameworks
- Additional detail added to specify the application of the liquidity risk requirements, including the treatment of crypto liabilities (that is, bank issued cryptoassets)
- Introduction of an exposure limit that will initially limit a bank’s total exposures to Group 2 cryptoassets to 1% of Tier 1 capital
This consultation does not address the prudential treatment of central bank digital currencies (CBDCs) while the prudential treatment of climate risks is being addressed separately. The Committee aims to finalize the standards around year-end and these standards may be tightened based on the overall risk assessment and also if shortcomings in the consultation proposals are identified or new elements of risks emerge.
Keywords: International, Banking, Crypto Assets, Basel, Regulatory Capital, Credit Risk, Market Risk, Liquidity Risk, Operational Risk, ML TF Risk, Operational Resilience, BCBS
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