As the cryptocurrency world sees enormous growth, banking regulators across the world want them to be placed under the toughest bank capital rules. The Basel Committee on Banking Supervision (BCBS), which is the world's most powerful banking organisation, has said banks that have a bigger exposure to cryptocurrencies should be placed under stricter capital norms that reflect on the higher risks.
In a report released on Thursday, the committee said policymakers of the world should step up efforts to regulate cryptos considering their fast emergence. "While banks' exposures to crypto-assets are currently limited, the continued growth and innovation in crypto-assets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment," the report said.
Cryptoassets have given rise to a range of concerns, including consumer protection, money laundering and terrorist financing, and their carbon footprint, the report added. It further stated that the growth of cryptoassets and related services has the potential to raise financial stability concerns and increased risks faced by banks.
The report also noted that certain cryptoassets have exhibited a high degree of volatility and could present risks for banks as exposures increase, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering/terrorist financing risk; and legal and reputation risks.
BCBS has decided to proceed with the public consultation to enable further work to continue with the additional benefit of incorporating feedback from external stakeholders. The committee has also called for "minimum capital standards" for banks in cases of assets such as tokens, while cryptos like Bitcoin could be placed under a "conservative" prudential regime.
It suggests all cryptocurrencies assets, including the most popular Bitcoin and Ethereum, would be placed under a new and stricter regime of a risk weight of 1,250 per cent, considering banks' exposure to cryptos. A high-risk weight (1,250 per cent) will lead to a "conservative outcome" for direct exposures to cryptoassets, the report said. This means banks would have to keep capital equal to their exposure in crypto on hold, BCBS said. Rules would also apply to decentralised finance and non-fungible tokens (NFTs) but cryptos rolled out by central banks have been kept out of it.
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