BCBS provides prudential standards for banks in respect of crypto-assets
The BCBS now clearly says that material exposures to cryptos should be disclosed and form part of banks’ internal liquidity and capital adequacy assessment processes – which the PRA has already said for the UK, but this was not necessarily the case for the rest of the world. We are still waiting for them to come back and tell us which exposure class is the best to deal with cryptos or whether they propose to introduce a new exposure class tailored to direct exposures to cryptos.
Further to its earlier statements in July last year the Basel Committee on Banking Supervision has now published a Statement on crypto-assets setting out its expectations on the prudential treatment of crypto-assets.
Consistent with its earlier views, the BCBS raises concerns on credit, liquidity and AML risks from crypto-assets and now sets out preliminary governance and disclosure standards for banks providing related activities or acquiring exposures to crypto-assets. The BCBS notes that currently the size of markets for crypto-assets is much smaller than financial markets and banks have limited direct exposures to them. However, their rapid growth raises concerns for financial stability.
Crypto-assets are not money
Consistent with its earlier views and relevant publications by other regulators on the issue (including the EBA and the PRA), the statement clarifies that crypto-assets (albeit referred to as crypto-currencies) do not carry the standard features of money - medium of exchange, store of value and unit of measurement - and are therefore not regarded as such. Also, crypto-assets are not legal tender, and are not backed by any government or public authority.
The BCBS acknowledges the high degree of volatility and lack of standardisation in crypto-markets and identifies that the following risks might potentially arise from crypto-assets:
- liquidity risk;
- credit risk;
- market risk;
- operational risk (including fraud and cyber risks);
- money laundering and terrorist financing risk, and
- legal and reputation risks.
Regulatory expectations If a bank is authorised and decides to acquire crypto-asset exposures or provide related services, the BSCB expects that it should comply with the following standards:
- Due diligence: Before acquiring exposures to crypto-assets or providing related services, banks should conduct due diligence to identify the relevant risks and should make sure that they have adequate risk management processes in place.
- Governance and risk management: Banks are expected to have a clear and robust risk management framework that is appropriate for the risks of their crypto-asset exposures and related services. The BCBS focuses on the anonymity of these markets and expects that banks will incorporate risks from crypto-assets in their current processes including those related to anti-money laundering and terrorism financing and sanctions, and fraud monitoring, but expects banks to take into account the high risk of exposures to or services relating to crypto-assets. The BCBS also touches on accountability by stating that board and senior management should be provided with timely and relevant information related to the bank's crypto-asset risk profile.
- ILAAP and ICAAP: The BCBS clarifies that exposures to crypto-assets should form part of banks’ internal liquidity and capital adequacy assessment processes.
- Disclosure: Banks should publicly disclose any material crypto-asset exposures or related services as part of their regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations. We expect this to mean that material exposures to crypto-assets will be included in banks’ Pillar 3 disclosures.
- Supervisory co-operation: Banks should (i) inform the competent authority of actual and planned crypto-asset exposure or activity in a timely manner and (ii) provide assurance that they have considered the risks associated with the activity and how to manage them.
What’s happening next?
The BCBS is monitoring banks’ exposures to crypto-assets and working closely with the FSB. The BCBS will issue its detailed rules on the prudential treatment of exposures to crypto-assets in due course. As discussed in its July statements, there is currently no exposure class specific to this type of exposures and the regulators are considering whether a tailored approach will be necessary in the future.