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    FSI Papers Discuss Emerging Issues on Crypto-Assets and Interest Rates

    May 17, 2023

    The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published brief papers on overview of policy measures taken in 19 jurisdictions to address the risks associated with activities that incorporate crypto-assets and distributed ledger technology programmability capabilities in financial services and on rising interest rates and their implications for banking supervision. In another update, the BIS Innovation Hub published a handbook that explores key aspects of how central bank digital currencies (CBDCs) could work for offline payments.

    The FSI paper on policy measures notes that the current regulatory initiatives for centrally managed crypto-asset activities focus mainly on issuers of security tokens and stablecoins as well as address risks from traditional financial intermediaries’ use of distributed ledger technologies and their programmability capabilities. In relation to community-managed activities, policy measures aim to address the risks posed by native tokens and decentralized finance protocols. For risks associated with users’ direct exposures to crypto-assets and related activities, initiatives tend to reflect the evolution of crypto-asset markets. The paper highlights that cooperation and coordination at the national and international levels remain essential to address the risks associated with crypto-assets and their markets. In this context, international standards that promote a consistent regulatory framework will play a key role in preventing regulatory arbitrage and a fragmented regulatory environment that could undermine financial stability.

    The paper on rising interest rates discusses how the effects of rising interest rates on bank balance sheets are addressed in existing accounting and prudential frameworks and outlines their supervisory implications. The paper indicates that while regulatory requirements are fundamental, they cannot, in isolation, address all ways in which higher rates could impact a bank's solvency and liquidity. Moreover, capital requirements are sensitive to banks' accounting classification choices, while liquidity rules are premised on assumptions about deposit stickiness and the ability to sell assets at a reasonable cost. The supervisory review process, on the other hand, takes into account bank-specific characteristics and provides supervisors with various tools to address the confluence of risks caused by rising rates, and the ability to act pre-emptively before risks crystallize. Therefore, authorities may consider whether further guidance on the implementation of Pillar 2—which is premised on supervisors’ ability and will to exercise sound judgment—is warranted to provide more structure and consistency in supervisory decision-making and, more broadly, to enhance the quality of supervision at the global level.

    The handbook on offline CBDC payments provides a comprehensive overview of the key aspects of offline payments with CBDC and is intended to serve as a guide for central banks considering implementing offline payments capabilities. The handbook provides some of the main reasons and usage scenarios for offline payments, a map and an explanation of the technology components, and a set of design criteria for risk management, privacy, inclusion, and resilience. It also provides a set of considerations that central banks can use to inform their planning, policy development, technology and business requirements, procurement activities, and future operations. The two key areas that require further development are interoperability and risk management systems for offline payments. 


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    Keywords: International, Banking, Regtech, Crypto-Assets, Decentralized Finance, Distributed Ledger Technology, Interest Rate Risk, Liquidity Risk, Basel, Regulatory Capital, CBDC, FSI, BIS, BIS Innovation Hub

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