Basel supervision arm of the BIS expresses risk warnings for cryptoassets

Crypto Winter’s consequences are now reaching global standard setting bodies for the banking establishment. Up to now, crypto related assets have been below the radar, so to speak, from an overall risk perspective, but the Basel Committee on Banking Supervision (BCBS), under the auspices of the Bank for International Settlements (BIS), has sent a directive to banks that:

Cryptoassets such as bitcoin pose potential risks to financial stability.

The BCBS, according to the BIS website, is the “primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.” The panel is comprised of 45 members, including central bankers and bank supervisors from 28 jurisdictions. The group’s charter is “to strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability.”

The panel is known for issuing directives to internationally active banks, for example, the Basel III Accord, which establishes prudent practices for determining appropriate capital levels, driven by a risk-weighting of all balance sheet assets. Up to now, there has been no directive related to cryptoassets, a term preferred by the panel, since it does not believe that all cryptocurrencies qualify as currencies, if a strict interpretation of the definition of a currency is applied. Apparently, the closure of several crypto exchanges and the volatility of price behavior in the market have given the group pause.

The BCBS position seems to reverse an appraisal offered up In March of 2018 by the Financial Stability Board, an independent international body that works closely with the BIS. At that time, this group’s assessment was that: “Cryptoassets do not pose risks to global financial stability at this time”. Much has changed in the past twelve months, at least enough when it comes to risk weighting of potential exposures for banks. The BCBS message to banks:

Increase transparency, including by making public disclosures of exposure to cryptoassets, both to consumers and to advisory boards.

The missive from the BCBS comes at a time when bank regulators are grappling with how to deal with basically an unregulated nascent sector within the banking purview of compliance obligations. Definitions are far from consistent by jurisdiction, but there are several ongoing projects on a global level that hopefully will solve the present regulatory conundrum. In the UK, for example, the FCA is seeking more clarity to define where its oversight responsibilities begin and end, after the government directed the agency to get more involved in its oversight activities.

Surveys in many jurisdictions have demonstrated a low level of awareness among consumers for all things crypto, although it is increasing, but the concern is that investors may be unaware that none of the national compensation schemes on the books may apply to investments with unregulated entities. As for banks, it is a known issue in the crypto ecosphere that the vast majority of banks are reticent to provide even a modicum of support for crypto-related entities, even in countries that have professed to be “crypto-friendly”.

The BCBS directive may only embolden the reticence that major banks have already displayed toward the crypto sector. The committee expressed concerns over legal and reputational risks to banks, citing “capital and liquidity risks, as well as the potential for cryptoassets to be used in money laundering and terrorist financing.” Banks are advised to increase “diligence in assessing the material risks associated with direct or indirect exposure to cryptoassets, as well as corporate frameworks to protect banks from exposure to fraud or money laundering.”

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