On 24 March 2022, the PRA published a Dear CEO letter it had sent to dual regulated firms concerning how the prudential framework applies to ensure that firms engaging in crypto activity manage the risks in a way that supports the firm’s safety and soundness.
The PRA has issued this Dear CEO letter as it is aware that whilst firms have taken limited exposure to cryptoassets todate, there is increased interest from banks and designated investment firms to enter various crypto markets. The letter is therefore intended to ensure that where firms do have exposures, they understand the PRA’s expectations around risk management and measurement against the existing prudential framework.
The PRA explains that while no one part of the current prudential framework fully captures crypto risks, a combination of strong risk controls, operational risk assessments, robust new product approval processes, Pillar 1, Pillar 2, and ongoing monitoring arrangements has the potential to provide firms with an appropriate interim treatment. Firms will need to use all aspects of the prudential framework, and consider the risks from first principles, to ensure that risks are appropriately considered, and mitigated and/or capitalised as needed. The PRA will continue to monitor any expansion of firms’ crypto-related activities.
The Dear CEO letter then discusses further:
- Strong risk controls.
- Prudential framework.
- Pillar 1 (market risk, counterparty credit risk).
- Pillar 2.
When discussing Pillar 2 the PRA mentions that operational risks are particularly relevant to certain crypto-related activities and gives the example that some activities will expose firms to greater levels of fraud or cyber risks. The PRA reminds firms that to the extent that they outsource their crypto activities they should have a detailed understanding of their residual liability. Firms should also consider both their legal and operational ability to access and gain control of relevant assets in the event of third-party service provider failures.
At the end of the Dear CEO letter the PRA states that it is launching a survey of firms covering existing crypto exposures and future plans for 2022. The PRA is asking for this information by 3 June 2022.