On 10 June 2021, the Basel Committee on Banking Supervision (BCBS) launched a public consultation on the prudential treatment of cryptoasset exposures by credit institutions. Following on from the BCBS’ December 2019 discussion paper where it sought stakeholders’ views on a range of issues relating to the prudential treatment of cryptoassets, the current consultation document presents a more defined prudential framework based on three general principles: (1) same risk, same activity, same treatment, (2) simplicity and (3) minimum standards. The consultation document is divided into the following six parts:

  1. General approach for minimum risk-based capital requirements: the BCBS proposes to divide cryptoassets into two categories: Group 1 cryptoassets and Group 2 cryptoassets, the latter being considered as higher risk and being subject to a newly prescribed conservative capital treatment. The consultation document sets out classification conditions for Group 1 cryptoassets, and a cryptoasset that fails to meet any of the conditions listed will be re-classified as a Group 2 cryptoasset. The BCBS also sets out the division of responsibilities between banks and supervisors for determining and monitoring compliance with the classification conditions.
  2. Capital requirements for Group 1 cryptoassets: Among other issues, the BCBS seeks stakeholders’ views on the design and calibration of an operational risk add-on for cryptoassets. It also proposes to further divide the Group 1 crytpoassets for the purpose of capital requirements into Group 1a cryptoassets (i.e. tokenised traditional assets) and Group 1b cryptoassets (i.e. crytpoassets with stabilisation mechanisms).
  3. Capital requirements for Group 2 cryptoassets: noting that Group 2 cryptoassets pose unique risks compared with Group 1 cryptoassets, the BCBS suggests to make them subject to newly prescribed capital requirements, which will only apply to those Group 2 crytpoassets which have not been deducted from Common Equity Tier 1 capital. The proposed capital requirement is based on a 1250% risk weight applied to the greater of the absolute value of the aggregate long positions and the absolute value of the aggregate short positions to which the bank is exposed, the risk weight assets (RWA) will be calculated separately for each Group 2 cryptoassets to which the bank is exposed. Cryptoasset derivatives would be treated under the same category of exposures.
  4. Other regulatory requirements: the BCBS notes that at this stage it is not proposing to prescribe any new regulatory treatment for Group 1a, 1b or Group 2 cryptoassets under the leverage ratio, large exposures framework or liquidity ratio requirements.
  5. Supervisory review and adjustment to Pillar 1 requirements: the BCBS confirms that banks with direct or indirect exposures to any form of crytpoassets are subject to the supervisory review process set out in the BCBS framework. For risks not captured under this framework, banks are to ensure that these are assessed, managed and appropriately mitigated on an ongoing basis. The BCBS identifies examples of such risks as, among other, risks attributable to operational and cyber risk, risks attributable to the underlying technology and risks attributable to money laundering and financing of terrorism. The BCBS also suggests that supervisors should review the appropriateness of banks’ policies and procedures for identifying and assessing those risks not captured by the minimum capital requirements, and adequacy of their assessment results.
  6. Disclosure requirements of cryptoassets: the BCBS confirms that the disclosure requirements for banks’ exposures to cryptoassets or related activities should follow the general guiding principles for banks’ Pillar 3 disclosures under the BCBS framework. This includes an obligation to disclose information regarding any material Group 1a, 1b and Group 2 cryptoasset exposures on a regular basis.

Stakeholders have until 10 September 2021 to provide submissions.

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