The Basel Committee on Banking Supervision (BCBS) have shone a light on the risks associated with crypto-assets in a statement issued on 13 March 2019, calling on banks who acquire exposures to crypto-assets to take appropriate and specific measures to mitigate such risks.

The BCBS is the primary global standard setter for the prudential regulation of banks.  Its mandate is to strengthen the regulation, supervision and practices of banks globally. The BCBS’ members consist of central banks and authorities with formal supervision of the banking businesses.  The Hong Kong Monetary Authority (HKMA) is a member of the BCBS.

The statement sets out the minimum standards which should be adopted by any bank that acquires crypto-asset exposures or provide related services:

  • Due diligence: before acquiring exposures to crypto-assets or providing related services, the bank should conduct a comprehensive analysis of the various associated risks, including liquidity risk, credit risk, market risk, operational risk, money laundering and terrorist financing risk, and legal and reputation risk;
  • Governance and risk management: the bank should have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services. This framework should be fully integrated into its overall risk management processes, including those related to anti-money laundering, combating financing of terrorism, evasion of sanctions and heightened fraud monitoring. The bank’s relevant senior management are expected to be involved in overseeing the risk assessment framework (and be provided with timely and relevant information to execute their duties).  An assessment of the risks related to direct and indirect crypto-asset exposures and other services should be incorporated into the bank’s internal capital and liquidity adequacy assessment processes;
  • Disclosure: the bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations; and
  • Supervisory dialogue: the bank should inform its supervisory authority of actual and planned crypto-asset exposures or activities in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks.

The HKMA endorsed BCBS’ statement in a circular dated 18 March 2019. The HKMA commented that authorised institutions should take note of the statement and those planning to engage in activities relating to crypto-assets should carry out discussions with the HKMA, as recommended in the statement, and be in a position to demonstrate that they have put in place appropriate systems and controls to identify and manage any risks associated with such activities.