In a recently published statement, the Basel Committee on Banking Supervision (BCBS) has raised concerns relating to the risks that crypto-assets pose to the global financial system. While it acknowledges that banks do not currently have significant exposure to crypto-assets, it warns that these assets are increasingly becoming a threat to financial stability.
These concerns are founded on the volatility, constant evolution, and lack of standardization of crypto-assets, which the BCBS believes exposes banks to liquidity, credit, operational, money laundering, legal, and reputational risks. It considers that crypto-assets should not be referred to as “cryptocurrencies,” given that they fall short of being currencies that are safe mediums of exchange.
The BCBS sets out the following four steps that it expects banks acquiring exposures in, or providing services related to, crypto-assets to take as a minimum:
- Due diligence: banks should have a full understanding of all risks associated with the relevant crypto-asset and consult experts where necessary;
- Governance and risk management: banks should have risk management frameworks for crypto-assets, which the BCBS would like integrated with the bank’s overall risk management process, with the relevant senior manager functions applying to ensure accountability of risk governance;
- Disclosure: banks should disclose material crypto-asset exposure; and
- Supervisory dialogue: banks should engage with their regulators in a timely manner to demonstrate that they have complied with all necessary rules and mitigated risks where possible.
The BCBS says that it will in due course clarify the “prudential treatment” of crypto-asset exposures to appropriately reflect their high degree of risk. This could involve additional capital requirements on banks’ crypto-asset exposures, which could deter banks from acquiring or providing services related to crypto-assets. We previously posted on the accelerating pace of developments in the realm of crypto-assets and this statement from Basel reflects the continued regulatory focus in this area.
We will continue to monitor developments in this regard.