Basel Committee Proposes Amendments to Rules on Banks' Crypto Asset Exposure
Summary:
The Basel Committee for Banking Supervision has suggested modifications to its rules on banks' interactions with digital currency assets. The committee proposed a series of amendments following extensive review work during 2023, focusing on the reserve assets of stablecoins. Proposed measures aim to mitigate redemption risks during periods of severe market stress, with a suggestion to limit stablecoin exposure to longer-term maturities. The committee will accept feedback on the proposed changes until March 28, 2024, with these updated prudential standards due to come into effect on January 1, 2025, regardless of whether the amendments are adopted.
The global banking regulator, the Basel Committee on Banking Supervision operated by the Bank for International Settlements (BIS), has suggested alterations to the rules governing banks' dealings with digital currency assets. This followed the publication on the BIS website, on December 14, of a paper detailing the consultation process. This document was the culmination of assessment work undergone throughout 2023, allowing the committee to put forward amendments to the pre-existing prudential norms for banks associated with stablecoins, established in December 2022. The primary area of consideration for potential changes pertain to the character of the reserve assets backing stablecoins, with a particular focus on capital-worthy crypto assets known as Group 1b in the prudential norms. Essentially, the matter at hand is the capital requirements depending on the risk assessment of underlying assets. The Committee's proposal zeroes in on the redemption risks amid periods of severe market stress, when issuers of stablecoins might find themselves on the receiving end of a sizeable volume of withdrawal requests, potentially leading to a forced and rapid sell-off. To mitigate this risk, the regulatory body is advising limits on stablecoin dealings to those with longer-term maturities, establishing a maturity cap for individual reserve assets. If longer-term assets are allowed inclusion as reserve assets, the committee posits that they should exceed the collateral required for stablecoin holder claims. This surplus collateral must adequately account for any potential devaluation so that the redemption value of the stablecoin remains at its pegged value in problematic periods and volatile markets. The document goes on to discuss credit quality criteria, listing a number of high credit quality reserve assets suitable for issuance by stablecoins: reserves retained by central banking institutions, marketable securities backed by sovereigns and top-rated central banks, and deposits in high credit quality banks. The committee will welcome feedback on the proposed changes until March 28, 2024. Irrespective of whether these prudential standards for stablecoins are revised or not, the application date will remain January 1, 2025. The Basel Committee consists of central banks and financial regulatory bodies from 28 jurisdictions, convening to exchange ideas on banking supervision and regulation. A separate consultation paper proposing that banks be mandated to supply measurable data on their exposure to digital assets and the associated capital and liquidity requirements was released by the committee in October 2023.
Published At
12/14/2023 2:52:17 PM
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