The document outlines the prudential treatment of banks' exposures to cryptoassets, finalized by the Basel Committee in June 2022. Cryptoassets are classified into two groups: Group 1, which meets specific conditions, and Group 2, which presents higher risks. The standard will be incorporated into the Basel framework by January 1, 2025, and includes capital requirements and redemption risk tests for stablecoins.
- Title: Prudential treatment of cryptoasset exposures
- Author: Basel Committee on Banking Supervision
- Year: 2022
- Type: banking prudential standard
- Scope: prudential treatment of banks' exposures to cryptoassets, including classification, capital requirements, operational risks, liquidity, leverage, exposure limits, and disclosure requirements.
- Target population: internationally supervised banks
- Sector: global banking sector
- Implementation period: planned implementation on January 1, 2025
- Document of 36 pages, with approximately 28 pages provided for this summary (p. 1-28).
The document finalizes the international prudential standard for the treatment of banks' exposures to cryptoassets, adopted by the Basel Committee and applicable from January 1, 2025 (p. 5). This standard addresses the need to manage the high and specific risks associated with cryptoassets, given their rapid growth and volatility. It imposes a continuous classification of cryptoassets into two groups:
- Group 1: cryptoassets meeting strict classification conditions, including traditional tokenized assets (Group 1a) and cryptoassets with effective stabilization mechanisms (Group 1b). These assets are subject to capital requirements aligned with the risks of the underlying traditional assets.
- Group 2: cryptoassets not meeting these conditions, including all unbacked cryptoassets, subject to a conservative prudential treatment with a risk weight of 1250% (Group 2b) or a modified treatment with limited recognition of hedging (Group 2a).
The standard also provides:
- An add-on for infrastructure risk activatable by authorities in case of weakness of underlying infrastructures (p. 6).
- A redemption risk test and a supervision/regulation requirement for stablecoins to ensure their robustness and governance (p. 7).
- An exposure limit to Group 2 cryptoassets set at 1% of Tier 1 capital, with a maximum threshold at 2% beyond which an even more conservative treatment applies (p. 7).
- The responsibility of banks to assess and notify the classification of cryptoassets, with supervisory power to correct classifications (p. 7).
- Clarifications on the treatment of custodial assets to avoid inappropriate application of risk requirements (p. 7).
The document details capital requirements for credit risk, market risk, CVA, operational risk, as well as liquidity, leverage, and exposure limit requirements, adapted to the specificities of cryptoassets (p. 9-28). It provides for continuous monitoring and future revisions to integrate market and technology developments (p. 8). This standard aims to protect financial stability while allowing prudent innovation in the banking sector.
- The document responds to the rise of cryptoassets and the risks they pose to financial stability and banking risk management (p. 5).
- After a second public consultation in June 2022, the Basel Committee finalized this standard to harmonize international regulation (p. 5).
- Objectives: define a clear, proportionate, and coherent prudential framework for exposures to cryptoassets, considering specific risks (credit, market, liquidity, operational, etc.) and technical characteristics of cryptoassets.
- Limits: the treatment of central bank digital currencies (CBDCs) is not covered and will be subject to further studies (p. 9).
- The scope covers direct and indirect exposures, including custody activities and derivatives (p. 9).
- The standard aims to ensure rigorous classification of cryptoassets, adequate capitalization, and enhanced supervision, while remaining adaptable to rapid sector developments (p. 8).
Cryptoasset classification:
- Cryptoassets classified into Group 1 (meeting strict conditions) and Group 2 (non-compliant) (p. 5-6).
- Group 1a: traditional tokenized assets with the same legal rights and risks as non-tokenized assets (p. 10).
- Group 1b: cryptoassets with effective stabilization mechanisms, ensuring value linked to a traditional asset (peg) and a successful redemption risk test (p. 11-13).
- Group 2a: cryptoassets not meeting conditions but meeting hedging recognition criteria (p. 17-24).
- Group 2b: cryptoassets without hedging recognition, subject to very conservative treatment (p. 24).
Capital requirements:
- Group 1a: capitalization aligned with underlying assets according to existing credit and market risk rules (p. 16-17, 19-21).
- Group 1b: capitalization covering risks related to reserve assets, redeemer default risk, and intermediaries in the redemption mechanism (p. 17-19).
- Group 2a: capitalization according to modified versions of simplified or standardized market risk approaches, with limited recognition of hedges (p. 17-24).
- Group 2b: application of a 1250% risk weight on the highest net position (long or short) to cover credit and market risks (p. 24).
Specific tests and requirements:
- Redemption risk test for stablecoins, ensuring reserves always cover obligations, even under extreme stress (p. 11-13).
- Supervision and regulation requirement for stablecoin issuers for inclusion in Group 1b (p. 7, 11).
- Removal of the basis risk test for now, with ongoing study (p. 7).
Exposure limits:
- Exposure limit to Group 2 cryptoassets set at 1% of Tier 1 capital, with a maximum threshold at 2% triggering more conservative treatment (p. 7).
- Exposure measurement considering the higher of long and short positions to avoid penalizing hedging (p. 7).
Responsibilities and supervision:
- Banks must continuously assess cryptoasset classification and notify supervisors (p. 14).
- Supervisors may override banks' classifications and must coordinate assessments to ensure international consistency (p. 14).
- Clarifications provided on the treatment of custodial assets to avoid erroneous application of risk requirements (p. 7).
Operational risks and liquidity:
- Operational risks related to cryptoassets included in the standardized calculation, with possible adjustments via the prudential review process (p. 23).
- Liquidity requirements (LCR, NSFR) aligned with equivalent traditional assets for Group 1a, excluding other groups as HQLA (p. 24-26).
- Specific treatment of tokenized liabilities and stablecoins in liquidity ratios, considering additional risks related to technical design and governance (p. 25-26).
Infrastructure risk add-on:
- Authorities may apply an add-on to capital requirements for Group 1 cryptoassets in case of infrastructure weakness (p. 6, 21).
Monitoring and future revisions:
- The Committee will monitor market developments, bank data, and adjust the standard if necessary (p. 8).
- Particular monitoring of statistical tests, permissionless blockchains, treatment of cryptoassets as collateral, hedging criteria for Group 2a, and exposure thresholds (p. 8).
- Findings:
- The final standard imposes strict classification of cryptoassets into two groups with distinct prudential treatments (p. 5-6).
- Group 1a and 1b cryptoassets benefit from treatment aligned with underlying traditional assets, subject to strict conditions (p. 10-19).
- Group 2 cryptoassets, notably unbacked, are subject to very conservative treatment with a 1250% risk weight (p. 24).
- A strict exposure limit to Group 2 cryptoassets is set to protect financial stability (p. 7).
- Assumptions:
- The basic risk test is not currently retained, assuming no reliable statistical test yet exists to identify low-risk stablecoins (p. 7).
- The optimal composition of reserve assets for the redemption risk test is yet to be defined (p. 7).
- Interpretations:
- The standard seeks to balance innovation and prudent risk management by adapting requirements to cryptoasset characteristics (p. 5-8).
- The infrastructure add-on encourages banks to actively manage risks related to DLT infrastructures (p. 6).
- Uncertainties:
- Rapid evolution of technologies and crypto markets may require future adjustments (p. 8).
- Treatment of cryptoassets on permissionless blockchains remains to be clarified (p. 8).
- Eligibility of cryptoassets as collateral and recognition of hedges in Group 2a are under continuous monitoring (p. 8).
- The Basel Committee has finalized a clear and detailed prudential standard for banks' exposures to cryptoassets, applicable from January 1, 2025 (p. 5).
- This standard imposes rigorous classification of cryptoassets and capital requirements adapted to their risk profile, with conservative treatment for the riskiest assets (Group 2) (p. 5-7).
- It includes mechanisms for continuous monitoring and revision to adapt to market and technology developments (p. 8).
- Banks are responsible for continuous evaluation of cryptoassets and must notify their classifications to supervisors, who have override powers (p. 14).
- The standard clarifies the treatment of custodial assets to avoid inappropriate requirements (p. 7).
- Authorities have discretionary power to apply an infrastructure risk add-on (p. 6).
- The Committee will continue work on several key topics, including statistical tests for stablecoins, treatment of permissionless blockchains, recognition of collateral, and calibration of exposure limits (p. 8).
- The standard will be integrated into the consolidated Basel framework and represents a major step to frame risks related to cryptoassets in the banking sector.
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