Blockchain & Crypto

BIS says crypto assets could put the banking system in danger

Last week, the world’s top banking regulator Bank for International Settlements (BIS) vowed to tighten regulations on crypto assets. This proposal is particularly for those assets that are more speculative, such as bitcoin.

The Basel Committee on Banking Supervision (BCBS) announced the opening of a public consultation on ideas for how banks throughout the world might best manage their crypto assets exposure. The BCBS has warned that crypto assets could put the banking system in danger.

While banks’ exposures to crypto-assets are currently limited, the continued growth and innovation in crypto-assets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.

The proposal addresses the amount of capital that banks must set aside to protect themselves against default risks. The BCBS is holding a public consultation on preliminary ideas “for the prudential treatment of banks’ crypto-asset exposures” through September 10.

The Proposal

The Basel Committee proposes splitting cryptocurrency assets into two categories. The first category is of crypto assets, which the Committee characterizes as “private digital assets that rely principally on encryption and distributed ledger or equivalent technology.” Stock tokens, for example, could fit within modified existing guidelines on bank minimum capital standards.

The second category includes assets that do not meet the categorisation criteria, such as bitcoin. “Because these offer additional and higher risks,” the BCBS stated, “they would be subject to a new cautious prudential treatment.”

As per the proposal, a 1,250 per cent risk weight should be added to a bank’s exposure to Bitcoin and other cryptocurrencies. LiveMint reports that a bank may need to retain $1 in capital for every $1 worth of Bitcoin, based on an 8% minimum capital requirement. Securitized products, where banks have limited knowledge about underlying holdings, are another asset with this highest-possible risk ranking.

These guidelines would apply to non-fungible tokens (NFTs) and assets issued by decentralised finance (DeFi). The Central Digital Currencies are not part of this consultation.

Despite the Basel Committee’s proposals from stricter regulation, investors appear to have gleaned their relative acceptance of cryptocurrency. With the publication of the report earlier this morning, Bitcoin gained by about $2,000 dollars.

The Basel Committee

The Basel Committee on Banking Supervision is the primary global standard setter for prudential regulation of banks. It provides a forum for regular cooperation on banking supervisory matters. It has 45 members, comprise of central banks and bank supervisors from 28 jurisdictions.

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Rajat Chawda

Rajat is a student at the Institute of Law, Nirma University. Since a young age, he was fascinated by the technological advancements and his fascination with gadgets has helped him develop a keen interest in TMT Laws in his journey as a law student. He is associated with Mylawrd to further engage himself and learn in this area.

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