Read deeper into the Basel Committee's views on cryptocurrencies. Here are a few details you can't ignore

On June 10, the Basel Committee on Banking Supervision issued a document that listed bitcoin as the highest risk category in bank capital proposals and proposed a risk weighting of 1,250 per cent for bitcoin assets, suggesting that banks set aside enough capital to fully cover any losses caused by bitcoin.

The Basel Committee on Banking Supervision is a formal institution of the Bank for International Settlements, which was jointly established by the central banks of the United States, the United Kingdom, France, Germany, Italy, Japan, the Netherlands, Canada, Belgium and Sweden at the end of 1974. Although the Basel Committee itself does not have the statutory power of transnational supervision, it is generally expected that each country will gradually implement the supervision standards and guidelines set by the Basel Committee according to its own actual situation, since the members of the Basel Committee come from the world's major developed countries.

The Basel committee on banking supervision issued by the official documents show that although the bank limited exposure to the encrypted assets at present, but as a result of encryption assets and related services continue to growth and innovation, and to some bank interest on the increase, in the absence of specific careful treatment, may increase the concerns of the global financial stability and the risks of banking system. Based on this, the Basel Committee on Banking Supervision developed this supervisory recommendation.

Rhythm excerpts and second edits of the document.

How does the Basel Committee on Banking Supervision define crypto assets?

The Basel Committee defines crypto assets as "private digital assets that rely primarily on cryptography and distributed ledgers and can be used for payment or investment purposes (seeThe FSB (2020) files)."

What has the Commission done in the area of digital asset regulation?

1. Closely monitor market and regulatory developments related to crypto assets and assess the impact of such developments on the banking system;

Quantify banks' direct and indirect exposure to crypto assets through regular data collection activities;

3. Conduct appropriate prudential treatment and evaluation for banks' crypto asset exposure.

Regulatory principles for crypto assets

The principle of equal risks, equal activities and equal requirements.Crypto assets with the same economic functions and the same risks should have the same capital, liquidity and other requirements as traditional assets compared to traditional assets. The prudential framework should adopt the concept of "technology neutrality" and should not explicitly advocate or discourage designs that use specific technologies.

Principle of Simplicity.Crypto assets are currently a relatively small asset class for banks. As the market, technology and related services for crypto assets continue to evolve, a simple and cautious approach is advantageous, and in principle can be reexamined in the future in light of the evolution of crypto assets.

Principle of Minimum Standards.Any careful handling of crypto assets specified by the Commission will constitute a minimum standard for an internationally active bank. Jurisdictions are free to take additional or more conservative measures if necessary. As a result, barring banks from having any exposure to crypto assets is also considered consistent with global prudential standards.

How does the commission view crypto assets?  

The growth of crypto assets and related services has the potential to raise financial stability issues and increase risks for banks. Certain crypto assets exhibit a high degree of volatility and may pose risks to the bank as exposure increases, including liquidity risk, credit risk, market risk, operational risk (including fraud and cyber risk), money laundering and terrorist financing risk, and legal and reputational risk.

Although the crypto asset market is still small relative to the global financial system. Banks' exposure to crypto assets is limited, but its sheer size is meaningful and continues to grow rapidly, attracting increasing attention. Crypto assets raise a range of concerns, including consumer protection, money laundering, terrorist financing, carbon footprint, and more.

How does the commission classify crypto assets?

In this document numbered D519, the Basel Committee made a detailed classification of crypto assets, which are classified into the first group of assets and the second group of assets, and the first group of assets is further subdivided into two categories: 1A and 1B.

Group 1A assets are tokenized traditional assets. Group 1B assets are crypto assets with stable mechanism. Other crypto assets such as bitcoin are called group 2 crypto assets.

Significantly, the Basel Committee believes that"Group 1 assets are eligible for processing under the existing Basel framework (with some modifications and additional guidance)." "These assets will be subject to existing rules and treated in the same way as bonds, loans, deposits, stocks or commodities."

(Image credit: Bank for International Settlements)

(Image compiled by Rhythm)

Are stablecoins such as USDT and DAI group 1 crypto assets?

Although Bitcoin is defined as a Group 2 asset with the highest risk weighting, some investors are hoping that stablecoin may be classified as a Group 1B asset and thus inject capital into the crypto market, which, unfortunately, Rulyx believes does not meet the Commission's regulatory criteria.

For the first group of assets, the committee put forward a clear request:

"A tokenized legacy asset must be a digital representation of a legacy asset using cryptography, distributed ledger technology, or the like,Rather than record ownership through a Central Securities Custodian (CSD) account.

Stabilization mechanisms must be designed. Banks must monitor the difference in value between crypto assets and traditional assets on a daily basis,The difference in value must not exceed 10 basis points of the value of traditional assets.

Banks must verify the ownership of any underlying traditional assets on which crypto assets depend.For underlying tangible assets, the bank must verify that these assets are properly stored and managed. Referencing other crypto assets as a stabilization mechanism for the underlying asset is not considered to satisfy this condition."

Ru believes that the regulation rules or instructions, such as Tether and other stablecoins that are difficult to be verified by banks as underlying collateral, and such as DAI and other algorithm-based stablecoins that are backed by crypto assets, cannot be regarded as Group 1B stablecoins from the perspective of the Committee for supervision.

How do you measure the risk of group 2 crypto assets such as bitcoin?

The committee proposed a simple, conservative method to calculate the RWA of group 2 crypto assets. The 1250 per cent risk weighting applies to the larger value of the bank's exposed total long and total short positions.

RWA = RW x max [abs(long), abs(short)]

RWA is calculated separately for each group 2 crypto asset that the bank is exposed to. For securities financing transactions (SFT) and margin loans involving Group 2 crypto assets, the counterparty credit risk exposure is calculated.

Disclosure requirements for crypto assets

Banks' disclosure requirements for crypto assets or related activities should follow the general guidelines of PILLAR 3 Disclosure in the Basel Framework.

In addition, banks are required to provide:

1. Business activities related to crypto assets and how these business activities translate into a component of the Bank's risk;

2. Banks' risk management policies related to crypto asset exposure;

3. Scope and main content of bank reports related to crypto assets;

4. The biggest current risks associated with crypto assets, emerging risks, and how to manage them.

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