GAMECHANGER: Basel Committee Oversight Group Sets Standard on Banks’ Cryptocurrency Exposure

Posted on 12/18/2022

On December 16, 2022, the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, endorsed a finalized prudential standard on banks’ cryptoasset exposures, including the Committee’s work program and strategic priorities for 2023–2024.

The Group of Central Bank Governors and Heads of Supervision endorsed the Committee’s finalized prudential treatment for banks’ exposures to cryptoassets. Unbacked cryptoassets and stablecoins, with ineffective stabilization mechanisms, will be subject to a conservative prudential treatment. This standard provides a robust, prudent global regulatory framework for internationally active banks and their relationship with cryptoassets. Not only will this action promote responsible innovation, but it also preserves financial stability. GHOS members agreed to implement the standard by January 1, 2025. Members have tasked the Committee with monitoring the implementation and effects of maintaining top notch standards.

The global banking system’s direct exposures to cryptoassets remains relatively low. However, recent developments highlight the importance of maintaining a strong global, minimum prudential framework. This system is in place for internationally active banks to mitigate risks to and from cryptoassets.

The Bank for International Settlements (BIS) reports on cryptocurrencies called, “Prudential treatment of cryptoasset exposures.” BIS advises the final standard structure for banks, regarding exposure to digital assets. Including, tokenized traditional assets, stablecoins, and unbacked cryptocurrencies.

According to the report, “Group 2 exposure limit: A bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%. Banks breaching the 1% limit will apply the more conservative Group 2b capital treatment to the amount by which the limit is exceeded. Breaching the 2% limit will result in the whole of Group 2 exposures being subject to the Group 2b capital treatment.”

Basel Committee
The Basel Committee sets the primary global standard for the prudential regulation of banks, through providing a forum that outlines banking supervisory matters. Not only does the overall mandate aim to strengthen the regulation, supervision and practices of all banks worldwide, but it also provides the enhancement of financial stability. The Committee reports to the Group of Central Bank Governors and Heads of Supervision, by seeking endorsements for major decisions. The Committee has no formal supranational authority, and decisions have no legal force. Rather, the Committee relies on the members’ commitments to achieving goals and enforcing mandates. The Central Bank of Governors and Head of Supervision, is led by none other than Tiff Macklem; Governor of the Bank of Canada. The Basel Committee is chaired by Pablo Hernández de Cos; Governor of the Bank of Spain.

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