Global Watchdog Assessing Banks’ Crypto Asset Exposure

The Basel Committee on Banking Supervision, which sets the standards for banks across the world, is measuring the extent of banks’ exposure to “crypto assets” such as Bitcoin.

The BCBS “is assessing the materiality of banks’ direct and indirect exposures to crypto assets, clarifying the prudential treatment of such exposures, and monitoring developments related to crypto assets for banks and supervisors,” the Financial Stability Board said in a report.

The FSB was established in 2009 by the G20 leaders to promote the reform of international financial regulation.

The group is hosted by the Bank for International Settlements in Basel, Switzerland and is currently chaired by the Bank of England Governor Mark Carney.

The latest report was delivered to the G20 Finance Ministers and Central Bank Governors for their meeting in Buenos Aires on July 21-22.

The Basel Committee is currently conducting “an initial stocktake on the materiality of banks’ direct and indirect exposures to crypto-assets,” the report said.

Currently, the Basel framework for banks does not prescribe how their exposure to crypto assets must be treated, but it lays down minimum requirements for the capital and liquidity treatment of “other assets”.

After the “stocktake”, the BCBS will consider whether to formally clarify the prudential treatment of crypto-assets across the set of risk categories such as credit risk, counter-party credit risk, market risk, liquidity risk and so on.

The report also said that the FSB, in collaboration with the Committee on Payments and Market Infrastructures, or CPMI, has developed a framework and identified metrics to monitor the financial stability implications of crypto-assets markets.

The framework was approved by the FSB Plenary at its June meeting in Basel.

The FSB holds the view that “crypto-assets do not pose a material risk to global financial stability at this time”, but has stressed on the need for vigilant monitoring, given the speed at which new developments spread in the cryptosphere and data gaps.

The framework identified metrics that can be used for monitoring the transmission channels from crypto asset markets to financial stability.

“Monitoring the size and rate of growth of crypto asset markets is critical to understanding the potential size of wealth effects, should a decline in valuations occur,” the report said.

“The use of leverage, and financial institution exposures to crypto-asset markets are important metrics of transmission of crypto-asset risks to the broader financial system.”

Other metrics to be monitored include those on price, confidence, derivatives, trading, and payment and settlements for crypto assets.

However, the report cautioned that the quality of the underlying data can vary and may not always be satisfactory. Further, these can be manipulated by disallowed activities such as “wash trading”, “spoofing” and “pump and dump”.

The CPMI has studied the application of the distributed ledger technology or Blockchain, and is exploring payment innovations, the report said.

The committee proposes that central banks must proceed with caution on central bank digital currencies, or CBDCs.

“…responding directly to the challenge with a central bank digital currency (CBDC) would be an entry into uncharted territory,” the report said.

Further, the International Organization of Securities Commissions has established an initial coin offering (ICO) Consultation Network to discuss experiences and concerns regarding ICOs.

The agency is also developing a Support Framework to assist members in addressing issues arising from ICOs that can impact investor protection, and also exploring regulatory issues linked to crypto asset platforms.

by Jyotsna VRTTNews Staff Writer

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