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Finalisation of prudential treatment of cryptoasset exposures for banks: how will this impact the market?

22 December 2022

Banks will benefit from greater clarity and certainty now that the Basel Committee on Banking Supervision (“BCBS”) has finalised its prudential standard on the treatment of banks’ exposures to cryptoassets.

The finalised standard is to be implemented by 1 January 2025 and could well be subject to further refinements and clarifications before then given the rapid pace of market developments and emerging risks.

Broadly speaking, under the prudential standard cryptoassets are split into two groups – group 1 includes tokenised traditional assets and cryptoassets with effective stabilisation mechanisms. Group 2 includes cryptoassets not meeting the conditions for group 1, including unbacked cryptoassets, and is subject to much more conservative capital treatment than group 1.

Some of the criteria for group 1 cryptoassets include:

  • infrastructure risk – which is to be taken into account based on any observed weaknesses in the infrastructure on which the cryptoassets are based; and
  • stablecoins must be issued by supervised and regulated entities that have robust redemption rights and governance.

The requirement that pegged cryptoassets could be sold in the market for an amount that closely tracks the peg value has not been applied; and banks will not require supervisory pre-approval of their cryptoasset classifications – albeit supervisors could override such classification decisions if they disagree with the assessments.

The BCBS will keep under review, amongst other matters, whether the risks posed by permissionless blockchains can be sufficiently mitigated to allow for their inclusion in group 1.

The approach here aligns with the principle of “same risk, same regulatory outcome”. Those cryptoassets meeting strict regulatory requirements get the most favourable capital treatment for banks, where exposure to those that do not is effectively strictly limited. The mainstream growth of the cryptoasset market and integration with the traditional financial sector is therefore constrained by the ability and capacity of regulation and regulators to keep pace with technological and market developments in the crypto sector.

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