BCBS Consults on Prudential Treatment of Cryptoasset Exposures

Bitcoin and other “Group 2 cryptoassets” will be subject to a 1250% risk weight to avoid exposing bank depositors and creditors to a loss.

The BCBS (Basel Committee on Banking Supervision) has issued a public consultation on preliminary proposals for the prudential treatment of banks’ cryptoasset exposures.

“While banks’ exposures to cryptoassets are currently limited, the continued growth and innovation in cryptoassets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment,” the BCBS says.

Given the rapidly evolving nature of this asset class, the BCBS believes that policy development for cryptoasset exposures is likely to involve more than one consultation. The initial public consultation follows a discussion paper published in December 2019, and will allow further work to continue with the benefit of incorporating feedback from external stakeholders.

The proposed prudential treatment outlined in the consultation divides cryptoassets into two broad groups:

Group 1 cryptoassets are those that fulfil a set of classification conditions and as such are eligible for treatment under the existing Basel Framework, with some modifications and additional guidance. These include certain tokenised traditional assets and stablecoins.

Tokenised assets will have credit and market risk capital requirements at least equivalent to those of traditional assets, while stablecoin requirements will be based on current rules. Both will essentially be treated in the same way as traditional assets, but subject to further consideration for capital add-ons.

Group 2 cryptoassets are those, such as bitcoin, that do not fulfil the classification conditions. Since these pose “additional and higher risks”, they would be subject to a new “conservative” prudential treatment, the BCBS says.

The prudential treatment in relation to credit and market risk requirements is based on a 1250% risk weight applied to the maximum of long and short positions in Group 2 cryptoassets. This would mean banks would have to hold capital at least equal in value to their exposures to cryptoassets in this group.

“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss,” the consultation paper says.

For both Group 1 and Group 2 cryptoassets, the Basel requirements on leverage ratio, large exposures, and liquidity ratios will also be applied, with additional guidance where applicable. Additional requirements are also proposed in relation to supervisory reviews and disclosures by banks on their cryptasset exposures.

CBDCs are not within the scope of the consultation.

The consultative document, available here, is open for comment until 10 September 2021.

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