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    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    September 21, 2021

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures. The BCBS consultation was published in June 2021. ISDA and the other associations support the BCBS decision to engage in an iterative approach for the prudential treatment of cryptoassets and suggest certain improvements to the proposal. Overall, the response letter reinforces that making greater use of the existing international prudential framework (Basel III) is the best way to achieve the principles underpinning the consultation.

    The Associations agree with BCBS that the approach should follow the principle of “same risk, same activity, same treatment” and that the prudential framework should be technology-neutral. However, adjustments are needed to achieve true technological neutrality. The Associations also believe that the framework should be as simple as possible and suggest that certain aspects of the proposal should be further simplified and/or made more risk-sensitive. Given the cross-border nature of the cryptoasset markets, the Associations support having minimum global standards, supported by coordination across jurisdictions to help ensure an approach that is consistent and comparable. The Associations recommend BCBS to ensure that the framework is not overly conservative, so that it does not preclude regulated bank involvement in certain segments of cryptoasset markets. The Associations recommend to BCBS that the framework for cryptoassets should utilize the existing prudential framework for all other bank exposures that has been developed over many years taking into account the following criteria:

    • The framework would allow for technological neutrality and be designed to reflect underlying risk.
    • The availability and use of effective hedging should be recognized in the prudential framework.
    • The need for differences in the capital treatment of cryptoassets held in the banking book versus the trading book should be recognized in the framework as it is for other bank exposures; this will help to appropriately capitalize the different risks of trading and banking book activities. For certain Group 2 cryptoassets, the exposure to changes in price is best captured through the market risk framework. Thus, for banking book exposures to this set of cryptoassets, applying the market risk framework would be appropriate, similar to the treatment of foreign exchange and commodities risk in the banking book under the current framework and net short credit and equity risk in the banking book in the future.
    • The capital treatment of Group 2 cryptoassets should be tied to the risks of the assets, not their accounting treatment. This approach should help avoid disparate treatment across jurisdictions resulting from different accounting regimes. Assets with different risk profiles should be subject to correspondingly different capital standards.

     

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    Keywords: International, Banking, Securities, Cryptoassets, Basel, Credit Risk, Market Risk, Large Exposures, Regulatory Capital, Hedging, Banking Book, Trading Book, BCBS, ISDA

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