The oversight body of the Basel Committee on Banking Supervision (BCBS) endorsed the prudential standard on crypto-asset exposures of banks, for implementation by January 01, 2025. In addition, BCBS has set out work program for 2023–24 and the Bank for International Settlements (BIS) published papers on decentralized finance, systemic fragility in decentralized markets, and regulation of bigtech firms, along with a set of papers addressing challenges ahead for the central banking after the pandemic.
The final standard on crypto-asset exposures is in the form of a new chapter of the consolidated Basel framework (SCO60: Cryptoasset exposures). The standard sets out the prudential treatment of bank exposures to crypto-assets, including tokenized traditional assets, stablecoins, and unbacked crypto-assets. The structure of the standard remains unchanged from the proposal set out in the second consultation, with banks being required to classify crypto-assets into two groups. Group 1 crypto-assets include tokenized traditional assets (Group 1a) and crypto-assets with effective stabilization mechanisms (Group 1b). Group 1 crypto-assets are subject to capital requirements based on the risk-weights of underlying exposures, as set out in the existing Basel framework. Group 2 includes all unbacked crypto-assets. Additional key elements of the standard include infrastructure risk add-on, redemption risk test and a supervision/regulation requirement, Group 2 exposure limit, and other elements, including descriptions of how the operational risk, liquidity, leverage ratio, and large exposures requirements should be applied. The supervisory review process and a specific set of disclosure requirements are also prescribed. The Committee has also agreed on a set of issues that will be subject to specific monitoring and review after implementation of this standard.
The work program for 2023-24, which is another item recently endorsed by the BCBS oversight body—known as the Group of Central Bank Governors and Heads of Supervision (GHOS)—sets out the following key priorities:
- Conduct a series of horizon scanning exercises and continue to assess the robustness and suitability of banks' credit risk models, drawing on the lessons learned from the initial phase of the pandemic and the evolving macro-financial outlook
- Publish an analytical report on the bank and supervisory implications of the ongoing digitalization of finance and conduct a deep-dive analysis on the supervisory implications of Banking as a Service
- Assess bank-related developments in crypto-asset markets, including the role of banks as stablecoin issuers, custodians of crypto-assets, and broader potential channels of interconnections with the crypto-asset ecosystem
- Monitor implementation of the prudential treatment of crypto-asset exposures of banks and review, by the end of 2023, the treatment of permissionless blockchains and the criteria to identify stablecoins eligible for the "Group 1b" prudential treatment, including the appropriate composition of reserve assets and the effectiveness of statistical tests
- Undertake analytical work to assess the materiality of climate-risk-related gaps in the existing Basel framework, discuss potential complementary work related to banks' transition planning and use of climate scenario analyses, and monitor the implementation of its principles for the effective management and supervision of climate-related financial risks
- coordinate with the International Sustainability Standards Board (ISSB) and, building on this work, seek to complement the ISSB initiatives by developing a set of bank-specific Pillar 3 disclosure requirements.
- Work on an update to the Core principles for effective banking supervision, developing additional guidance for banks' interconnections with non-bank financial intermediation (NBFI), developing updated supervisory principles on banks' outsourcing practices and reliance on third- and fourth-party service providers, and reviewing the shock scenarios developed in its standard on interest rate risk in the banking book.
- Monitor the status of Basel III implementation across member jurisdictions, pursuing its Regulatory Consistency Assessment Program and evaluating the impact and efficacy of Basel III in the medium term
BIS also published papers presented at the 21st Annual Conference in Basel, Switzerland. Below are the key highlights of these papers:
- The paper on cryptocurrencies and decentralized finance compares the new decentralized finance architecture with traditional financial market solutions and lays out how these two regimes solve some of the most important problems in financial systems, such as data privacy and transparency, extraction of rents, transactions costs, governance issues, and systemic risk. The paper highlights ways to regulate the decentralized finance system, which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.
- The paper on systemic fragility in decentralized markets discusses the ways in which third-party collateral liquidations affect protocol risk, collateral risk, and risks to the decentralized financial system. The paper highlights the systemic fragility of decentralized markets and finds that, consistent with large block trades in equity markets, there is a temporary and permanent price impact of collateral asset sales in decentralized finance.
- The paper on regulation of big tech firms reviews the unique conditions that make digital platform markets prone to tipping. It postulates ways to restore competitive conditions in these markets and highlights the need for regulation at the international level to address the problems of digital markets.
- The fourth paper inspects four tentative hypotheses for why central banks failed to prevent this burst of high inflation.
- Press Release on Crypto Standard and Work Program
- Standard on Crypto-Asset Exposures
- Work Priorities for 2023-24
- BIS Papers
- Paper on Decentralized Finance
- Paper on Decentralized Markets
- Paper on Regulating Big Tech Firms
- Paper on Failure to Address Inflation
Keywords: International, Banking, Basel, Work Program, Regulatory Capital, Stablecoins, Decentralized Finance, Climate Change Risk, Bigtech, Regtech, NBFI, Third Party Risk, Scenario Analyses, Disclosures, Crypto Assets, ESG, BCBS, BIS
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