Last year the Basel Committee published its standard for bank exposures to crypto-assets. This month it will consult on some changes. One of the issues is the treatment of stablecoins. Additionally, it appears that permissionless blockchains seem to be problematic for tokenized securities. And the Committee wants to keep an eye on digital asset custody.
Apart from stablecoins, the consultation will include technical amendments to clarify intent.
Two groups of assets are treated as having lower risk – qualifying tokenized securities and qualifying stablecoins. Lower risk means banks don’t have to set aside additional capital over and above what they usually would if the asset were not tokenized.
In order to publish the crypto rules last year, the Committee dropped some of its requirements around statistical tests to ensure stablecoins don’t deviate from their peg. No stablecoin would have passed the tests.
During an October speech, the Chair of the Basel Committee, Pablo Hernández de Cos, said that new rules would cover stablecoin reserve asset composition and the effectiveness of statistical tests. Hence, we’re guessing that will be part of the consultation.
Digital asset custody
Last year there was a massive sigh of relief when the Basel Committee didn’t treat digital asset custody significantly differently from conventional custody. In contrast, the U.S. SEC insisted that crypto under custody should appear on the balance sheet. That’s a topic that has gotten the SEC into hot water with Congress.
Today’s statement doesn’t yet suggest a different treatment. However, it says that digital asset custody “raises various operational risks for banks”. It reiterates the need to comply with the principles of operational resilience and operational risk. And it “will consider whether any additional work may be needed.”
Permissionless blockchains are high risk…
We interpreted last year’s rules as leaving the issue of permissionless blockchains rather open. At the time, the Committee said it would continue to consider the issue of whether it’s possible to sufficiently deal with permissionless blockchain risks so that tokenized securities can be classed as lower risk for Group 1.
If a tokenized security lands up in group 2, it gets the same treatment as cryptocurrencies. That means banks must set aside (at least) a dollar of capital for every dollar of tokenized securities they own on a public blockchain.
However, it seems our interpretation was overly optimistic. Today the Committee said it “concluded that cryptoassets that use permissionless blockchains create risks that cannot be sufficiently mitigated at present and therefore agreed to retain the existing treatment for such cryptoassets.” We didn’t think it previously clarified the treatment. But it seems it means they will class public blockchain security tokens as Group 2.
The permissionless blockchain conundrum
Public blockchains are becoming increasingly popular for digital securities. Arguably they are viewed as offering wider distribution, better interoperability and lower setup costs.
The challenge is that asset managers are interested in public blockchains. Asset managers that are not associated with banks are not subject to Basel rules. So if asset managers can use public blockchains but bank owned asset managers are penalized, that’s not a level playing field.
Meanwhile, the Basel Committee recently launched a consultation on how banks should disclose their crypto-asset exposures to regulators.