Influential Basel Banking Committee inch closer to cryptoasset rules

The Basel Committee (BC) of world bankers is drawing ever closer to its recommendation of industry-wide rules on the treatment of cryptoassets

Copper Team

The powerful banking organisation put out a discussion paper on 12 December 2019 highlighting the need for cross-border, cross-sector rules, asking industry leaders to lay out their top priorities. The consultation will close on 13 March 2020.

While the cryptoasset market is small relative to the size of the global financial system “its absolute size is meaningful” the committee says. Also while the major banks have limited exposure to cryptoassets, “rapid developments” in the space mean this could quickly change, the committee adds.

The BC is a panel made up of 45 central bankers from the world’s largest and most active economies, including Argentina, Australia, Brazil, Canada, China, France, Germany, the UK and the United States.

It tracks major world business trends and the threats and risks these may pose to banking stability.

Stay prudent

The key point the BC want to make it that they are strongly behind “prudent treatment of bank exposure to cryptoassets”. This included setting rules for the potential capital and liquidity requirements for banks worldwide when considering how much and which cryptoassets they hold or trade.

After the 2007-2008 financial crisis, banks were forced to change their debt-to-asset ratios to ensure they could stay afloat in the face of any further squeeze on credit.

The reforms, specifically the Basel III Accord, put in place a framework that required banks to maintain proper leverage ratios to make sure they could meet minimum capital requirements.

And a new voluntary framework for cryptoassets which follows along the same lines as Basel III could be the ultimate outcome from this paper. Once multinational banks are able to access more liquidity, safe in the knowledge they are acceding to global banking regulatory concerns, it’s clear that greater mass adoption will follow.

How to split cryptoassets

The rise of stablecoins like Tether, Paxos and USD Coin — and potentially Facebook’s Libra — means the global banking community’s opinion on cryptoassets appear to be splitting into three defined areas.

Firstly, in the BC’s view, there are the so-called “high-risk cryptoassets” including the best known coins, like Bitcoin, Bitcoin Cash or Zcash.

Secondly: stablecoins, which are backed by reserves of fiat currencies or commodities like gold and silver, and according to this consultation paper, are widely considered to be of lower operational risk to the banking community.

In Basel speak, that reads: “Cryptoassets used exclusively for intra and inter-bank settlements may have a different risk profile compared to other cryptoassets.”

Thirdly, security tokens or those that “represent a claim on an underlying asset” which the Committee says will have to “depend on the controls and governance in place to ensure valuation stability”. This will likely include regular external audits so that token issuers cannot simply inform the market without supervision how much their underlying assets are worth, as the Tether debacle has exposed.

Cryptocurrencies or cryptoassets falling under each of these definitions will likely be treated differently, the BC notes.

This appears to follow the likes of the Financial Conduct Authority in their proposed treatment of cryptoassets, as the UK financial regulator split the market into security tokens, which it said it would regulate, utility tokens like EOS which, in the event that they meet the definition of e-money, it might regulate, and ‘exchange tokens’ like Bitcoin and Litecoin which it said would largely remain unregulated.

Conclusions are difficult to draw until the Committee has received its recommendations and compiled its reports, but certainly one thing is clear: that the influential panel of central bankers believe that the growth of the cryptoasset sector is so important it will change the space forever.

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