Governors and Heads of Supervision (Basel Oversight Committee) endorsed the global bank prudential standard for cryptoassets and work program of Basel committee.
GHOS endorsed the Committee's prudential treatment for exposures to cryptoassets.
Unbacked cryptoassets and stablecoins with ineffective stabilization mechanisms will be subject to a conservative prudential treatment; the standard will provide a robust and prudent global regulatory framework for internationally active banks' exposures.
A framework that promotes responsible innovation while preserving financial stability.
GHOS members agreed to implement the standard by Jan. 1, 2025, and tasked the Committee with monitoring the implementation and effects of the standard.
While banking system's direct exposures to cryptoassets remain relatively low, recent developments have highlighted the importance of having a strong global minimum prudential framework for internationally active banks to mitigate cryptoasset risks.
To that end, the GHOS tasked the Committee with continuing to assess bank-related developments in cryptoasset markets, including the role of banks as stablecoin issuers, custodians of cryptoassets and broader potential channels of interconnections.
The Committee will continue to collaborate with other standard-setting bodies and the FSB to ensure a consistent global regulatory treatment of stablecoins.
Structure
Structure of standard is unchanged from proposal set out in the second consultation.
Under standard banks must classify cryptoassets on an ongoing basis into 2 groups:
Group 1 cryptoassets: those that meet in full a set of classification conditions.
Include tokenized traditional assets (Group 1a)/cryptoassets with effective stabilisation mechanisms (Group 1b); group 1 assets are subject to capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework.
Group 2 cryptoassets: those that fail to meet any of the classification conditions.
As a result, they pose additional and higher risks compared with Group 1 cryptoassets and consequently are subject to a newly prescribed conservative capital treatment.
In addition to any tokenized traditional assets and stablecoins that fail the classification conditions, Group 2 includes all unbacked cryptoassets.
A set of hedging recognition criteria is used to identify those Group 2 cryptoassets where a limited degree of hedging is permitted to be recognized (Group 2a) and those where hedging is not recognized (Group 2b).
Additional Key Elements
Infrastructure risk add-on: an add-on to risk-weighted assets (RWA) to cover infrastructure risk for all Group 1 cryptoassets that authorities can activate based on any observed weaknesses in the infrastructure on which cryptoassets are based.
Redemption risk test and a supervision/regulation requirement: this test and requirement must be met for stablecoins to be eligible for inclusion in Group 1.
They seek to ensure that only stablecoins issued by supervised and regulated entities that have robust redemption rights and governance are eligible for inclusion.
Group 2 exposure limit: a bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%.
Banks breaching the 1% limit will apply more conservative Group 2b capital treatment to the amount by which the limit is exceeded; breaching the 2% limit will result in the whole of Group 2 exposures being subject to the Group 2b capital treatment.
Other elements: include descriptions of how operational risk, liquidity, leverage ratio and large exposures requirements should be applied to banks’ cryptoasset exposures.
Supervisory review process, specific set of disclosure requirements are also prescribed.
Infrastructure Risk Add-on
In the second consultation the add-on for infrastructure risk was proposed as a fixed add-on to RWA set at 2.5% of the exposure value for all Group 1 cryptoassets.
Committee agreed to replace this with a more flexible approach that allows authorities to initiate and increase an add-on based on any observed weaknesses in infrastructure that underlies specific cryptoassets; such approach should incentivize banks to actively address infrastructure risks to avoid the imposition of an add-on at a future point.
Basis Risk Test, Redemption Risk Test
Group 1 conditions set out in 2nd consultation included requirement that cryptoassets with stabilization mechanisms must pass a redemption risk test and a basis risk test.
Objective of the redemption risk test is to ensure that the reserve assets are sufficient to enable the cryptoassets to be redeemable at all times, including during periods of extreme stress, for the amount to which the cryptoasset is pegged (the peg value).
Basis risk test, which is a quantitative test based on the market value, aims to ensure that holder of a cryptoasset can sell it for an amount that closely tracks the peg value.
Committee noted in 2nd consultation that it was considering as an alternative to basis risk/redemption risk tests a requirement for stablecoins to be supervised/regulated by a supervisory authority that applies prudential capital and liquidity requirements.
After reflecting on merits, Committee decided not to implement basis risk test now.
Committee will further study whether there are statistical tests that can identify low-risk stablecoins, and if such test is identified, will consider it as additional requirement.
Furthermore, the Committee agreed that the supervision/regulation requirement should apply in addition to the requirement to pass the redemption risk test.
For cryptoassets that are pegged to one or more currencies, the redemption risk test now also includes a requirement that the reserve assets must be comprised of assets with minimal market risk and credit risk; the Committee will further study the appropriate composition of reserve assets for the purpose of the redemption risk test.
Group 2 Exposure Limit
Requirement for banks to keep aggregate exposures to Group 2 below a threshold of 1% of Tier 1 capital has been retained in the final standard, subject to modifications.
First modification will result in exposures being measured as the higher of the gross long and gross short position in each cryptoasset, rather than the aggregate of the absolute values of long and short exposures, as proposed in the second consultation.
Will ensure that banks taking steps to hedge exposures are not penalized under limit.
The second modification relates to the capital consequences of a breach of the limit.
To reduce cliff effects, the Committee has agreed that the consequence of breaching the limit will be for the Group 2b capital treatment to apply to only the amount by which the limit is exceeded, rather than to all Group 2 exposures.
However, to ensure that banks have a strong incentive to not significantly exceed the 1% threshold, a new 2% limit will be introduced which, if breached, will result in the whole of Group 2 exposures being subject to the Group 2b capital treatment.
Assessing Classification Conditions
Under second consultation, banks were required to assess cryptoassets against the classification conditions and seek prior supervisory approval to finalize classification.
Committee agrees with feedback to consultation that this could be unnecessarily burdensome, particularly in cases where compliance or breach of conditions is clear.
As a result, the required process has been modified to remove the supervisory pre-approval element; instead, in final standard banks are required to notify supervisors of classification decisions and supervisors will have the power to override these decisions.
Custodial Assets
Respondents to the second consultation raised concerns about the application of the standard in relation to customer assets where a bank is acting as a custodian.
Respondents were concerned that the standard may imply the application of credit, market and liquidity risk requirements to those customer assets.
This was not the intention of the standard; the standard has therefore been revised to clarify which elements are applicable to custodial services provided by banks.
Effectiveness
GHOS members agreed to implement the standard by Jan. 1, 2025
Work Program for 2023–24
GHOS also endorsed strategic priorities and work program of Committee for 2023–24.
In addition to pursuing forward-looking approach to identifying/assessing emerging risks and vulnerabilities to the global banking system, the work program places high priority on work related to the ongoing digitalization of finance, climate-related financial risks and monitoring, implementing and evaluating the Basel III framework.
May 31, 2023 Executive Summary
On May 31, 2023, Basel published the Prudential treatment of cryptoasset exposures executive summary, explaining the standard's bank minimum regulatory, supervisory review and disclosure requirements under pillars 1, 2, 3 of the Basel framework.
