Basel Committee calls for 'prudential' rules for crypto as they pose risks to banks

Quick Take

  • The Basel Committee wants to bring in a “prudential” regulatory treatment for crypto
  • The committee believes that crypto has the potential to raise financial stability concerns and increase risks faced by banks
  • It has, therefore, proposed several measures and is inviting comments from all stakeholders until March 13, 2020

The Basel Committee on Banking Supervision, which includes banking regulators from the U.S., U.K., Japan, and several other countries, has called for "prudential" regulatory treatment of cryptocurrencies and stablecoins. 

The committee, a unit of the Bank for International Settlements, has published a discussion paper, saying that the growth of cryptocurrencies and related services could pose risks to financial stability and banks, and therefore, a “conservative prudential” treatment to cryptocurrency exposures should be applied.

“If banks are authorized, and decide, to acquire crypto-assets or provide related services, the Committee is of the view that they should apply a conservative prudential treatment to such exposures, especially for high-risk crypto-assets,” it said.

Exposure to cryptocurrencies could be direct (direct holdings) or indirect (e.g. derivatives) and accordingly, capital and liquidity requirements rules could apply. For instance, the committee has proposed that crypto-assets should not be eligible to serve as financial collateral for the purpose of the credit risk mitigation framework.

It has also recommended that bank exposures to crypto-assets should be subject to a “full deduction” from Common Equity Tier 1 capital, which mainly consists of common stock held by a bank. “This treatment reflects the high degree of uncertainty about the positive realizable value of crypto-assets in times of stress,” it added.

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