A&O Shearman | FinReg | Basel Committee on Banking Supervision Consults Further on Capital Requirements for Banks' Exposures to Crypto-Assets
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  • Basel Committee on Banking Supervision Consults Further on Capital Requirements for Banks' Exposures to Crypto-Assets

    Following its consultation last year, the Basel Committee on Banking Supervision has launched a second consultation on bank prudential requirements for exposures to crypto-assets. The first consultation set out a preliminary proposal for the prudential treatment of crypto-assets, based on feedback to the 2019 discussion paper and other input from stakeholders. This second consultation proposes revisions to the initial proposals based on the feedback received and sets out proposed minimum standards based on the principle of "same risk, same activity, same treatment". Responses to the consultation may be submitted until September 30, 2022. The Basel Committee intends to publish final standards before the year-end; standards may be stricter than those presented in this consultation if feedback indicates any deficiencies.

    The Basel Committee is maintaining its approach of adopting different prudential treatments depending on whether a crypto-asset meets certain conditions. Crypto-assets that meet all of the conditions are referred to as Group 1 crypto-assets and will be subject to the existing Basel framework. Group 2 crypto-assets are those that do not meet the conditions and are therefore deemed to present additional and higher risks than Group 1 crypto-assets. Group 2 crypto-assets will be subject to an adapted prudential regime, with netting and a 100% capital charge. Group 1 and Group 2 crypto-assets could be tokenized crypto-assets and stablecoins; Group 2 could also include unbacked crypto-assets.

    The main changes to the original proposals are:
    1. Enhancements to the classification conditions, including a revised stabilization test for Group 1b (stablecoins).
    2. For all Group 1 crypto-assets, the introduction of an add-on to risk-weighted assets to cover infrastructure risk due to the evolving and unknown nature of the distributed ledger technology infrastructure on which crypto-assets are based.
    3. The division of Group 2 crypto-assets into those that meet a set of hedging recognition criteria (Group 2a) and those that do not (Group 2b). Modified market risk requirements will apply to exposures to Group 2a crypto-assets.
    4. Removing the link between the accounting classification and the capital requirements so that the prudential treatments do not depend on the categorization of a crypto-asset as either tangible or intangible under account standards. This is intended to bring more certainty since the accounting standards are evolving.
    5. Clarification of the risks that would fall into the operational risk framework and the risks that would be subject to the credit and market risk frameworks.
    6. Provision of more detail on the application of the liquidity risk requirements, including the treatment of bank issued crypto-assets (crypto-liabilities).
    7. The introduction of an exposure limit for Group 2 crypto-assets, which limit a bank's total exposure to 1% of Tier 1 capital.

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