Basel Committee seeks views on prudential treatment of cryptoassets

The Basel Committee on Banking Supervision is calling for views on issues related to the prudential regulatory treatment of cryptoassets

What has happened?

The Basel Committee on Banking Supervision (BCBS) has published a discussion paper seeking views on the design of a prudential treatment for cryptoassets.

What does this mean?

The BCBS said that the past few years have seen rapid growth in cryptoassets, but the market is still small relative to the size of the global financial system and banks' exposure to cryptoassets is still limited.

However, the absolute size of the market is meaningful and the situation is evolving, with a range of stakeholders paying increasing attention.

The BCBS's view is that the growth of cryptoassets and related services could raise financial stability concerns and increase the risks faced by banks, including liquidity, credit, market, operational (including fraud and cyber), money laundering and terrorist financing, and legal and reputation risks.

"If banks are authorised, and decide, to acquire cryptoassets or provide related services, the Committee is of the view that they should apply a conservative prudential treatment to such exposures, especially for high-risk cryptoassets," the BCBS said.

The discussion paper therefore seeks views on the prudential regulatory treatment of cryptoassets, including:

  • the features and risk characteristics of cryptoassets that should inform the design of a prudential treatment for banks' cryptoasset exposures; and
  • general principles and considerations to guide the design of a prudential treatment of banks' exposures to cryptoassets, including an illustrative example of potential capital and liquidity requirements for exposures to high-risk cryptoassets.

Comments are welcome from academics, banks, central banks, finance ministries, market participants, payment system operators and providers, supervisory authorities, technology companies and the general public.

The deadline for submitting comments is 13 March 2020.

The BCBS is one of the committees of the Bank for International Settlements (BIS).

In a separate development, the BIS Committee on Payments and Market Infrastructures (CPMI) has set out a list of criteria for developers and market participants to consider when designing digital tokens for use in wholesale transactions.

The CPMI said that, traditionally, wholesale transactions are settled by updating balances in account records on a centralised register such as the ledger of a settlement institution.

However, new technologies, such as distributed ledger technology (DLT), make it possible to create digital tokens that could potentially be used to effect settlement.

The Wholesale digital tokens report describes the potential innovations and design questions associated with digital tokens that could be used to settle wholesale, or large-value, payments, made possible by new technologies such as blockchain, or DLT.

The report covers only variants of digital tokens issued by identifiable issuers and denominated in sovereign currency and is not directed at stablecoins for retail payments.

Benoît Cœuré, Chair of the CPMI, said:

"This report outlines useful considerations for token designers. However, there is no single roadmap for success. Success will depend on whether wholesale digital tokens can provide both improved safety and increased efficiency over the traditional account-based settlement assets used today."

The report describes the critical elements of wholesale digital token arrangements and discusses some potential design choices.

It also includes questions that token developers may need to consider.

Important considerations include availability, issuance and redemption, access, underlying assets/funds and claims, transfer mechanism, privacy and regulatory compliance, and interoperability.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while keeping track of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Contacts
John Salmon
Partner
London

 

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