On 10 June 2021, the Basel Committee on Banking Supervision issued a public consultation on the prudential treatment of cryptoasset exposures. The 21-page consultative document follows a discussion paper published in December 2019, which generated 32 public comments from key industry participants. Recognizing the speed at which the cryptoasset class is evolving, the Committee expects to undergo multiple consultations on this topic. Stakeholders are invited to submit comments by 10 September 2021.
The consultation paper proposes minimum standards for the prudential treatment of banks' exposures to cryptoassets. The proposed standards are designed to be simple and technology neutral, and oftentimes are based on the prudential treatment of comparable traditional assets already regulated under the Basel Framework. The paper identifies potential operational, credit and market risks in connection with cryptoassets and proposes a new conservative prudential treatment for cryptoassets that generally are not linked to a regulated traditional asset (e.g., bitcoin).
The below table provides an overview of the Committee's proposals. The classification, risk-weighting and capital requirements of cryptoassets are explained in more detail in the following sections.
Table 1 – An overview of the prudential treatment of cryptoasset exposures.
As a first step, banks are tasked with classifying cryptoassets into two groups, Group 1 and Group 2. Group 1 cryptoassets consist of cryptoassets that meet all of the four of the "classification conditions" set out below. Group 1 is further broken down into two sub-groups: Group 1a consists of "tokenised traditional assets", while Group 1b consists of cryptoassets with effective stabilisation mechanisms (i.e., stablecoins). Group 2 cryptoassets include all cryptoassets that do not qualify for Group 1, for example bitcoin.
The four classification conditions for Group 1 are as follows:
A cryptoasset that fails to meet any of the above conditions is classified in Group 2.
The consultation document proposes minimum risk-based capital requirements for cryptoassets classified into Group 1.
To address the operational risks associated with a bank's activities related to cryptoassets, the Committee proposes a Pillar 1 add-on operational risk charge for all Group 1 cryptoassets to which a bank is exposed. The Committee leaves open how this risk charge could be set, suggesting that a fixed or variable amount, or even an amount that decreases over time, could be used. However, the Committee notes that calibrating a gradually decreasing risk charge would pose a significant challenge.
Capital requirements for tokenised traditional assets (Group 1a)
In terms of credit and market risk, tokenised traditional assets falling into Group 1a generally may be treated as equivalent to a traditional asset for the purpose of calculating minimum capital requirements. The key condition is that the cryptoasset must confer the same level of legal rights as the comparable traditional asset. Banks should not assume this will always be the case. For example, the tokenised traditional asset may have different characteristics than its non-tokenised equivalent in terms of liquidity, market values and collateral recognition. In such a case, a bank would have to apply different risk weights to accommodate the additional risks.
Capital requirements for stablecoins (Group 1b)
Separate risk-weighted assets (RWA) calculations are provided for stablecoins falling under Group 1b. The Committee, acknowledging the myriad ways a stabilisation mechanism can be structured, provides two representative examples and applies the capital requirements in each case.
In "Illustrative example 1", an entity (the "redeemer") commits to exchange the stablecoin for the underlying traditional asset or for cash. The holders of the stablecoin have a direct contractual claim against the redeemer.
Illustrative example 1 – Case where cryptoasset holders transact directly with the redeemer
To calculate risk-weighted assets for this type of stablecoin, banks must include in RWA the sum of the following two amounts:
In "Illustrative example 2", the contractual claim for redemption is intermediated by a subgroup of "members" who sit between the redeemer and the other stablecoin holders.
Illustrative example 2 – Case where cryptoasset holders transact indirectly with the redeemer
The RWA calculation for members should be the same as the calculation set out in Illustrative example 1. In addition, if members are obligated to buy the stablecoin from holders, members must also include within credit risk-weighted assets an amount equal to:
For non-member holders, the RWA calculation depends on whether members have committed to buy the stablecoin in unlimited amounts. The consultation document lists various risks that should be included in each case.
The Committee proposes newly prescribed capital requirements for cryptoassets classified into Group 2. The treatment is as follows:
RWA = RW x max .
The above formula is designed to ensure that banks will hold risk-based capital at least equal in value to their Group 2 cryptoasset exposures. For example, an exposure of EUR 100 in cryptoassets would result in a minimum capital requirement of EUR 100. The rationale is that depositors and other senior creditors of a bank would not face a loss in the event of a full write-off of the cryptoasset exposures.
Stakeholders are invited to propose alternative approaches to the application of a 1250 % risk weight that are simple, conservative and easy to implement. Given that several consultations are envisioned, we expect the capital requirements for Group 2 cryptoassets to undergo multiple revisions and fine-tuning before they are finalized.