Basel Committee endorses 2% exposure limit to mitigate crypto asset risk

By Cynthia Ezekwe

The Basel Committee on Banking Supervision (BCBS), an international committee formed by the Bank of International Settlements (BIS) has endorsed its global crypto banking rules, setting a two per cent limit on bank’s exposure to certain crypto assets, in order to reduce the risk to manage the risks posed by digital assets.

According to the global standard setter for banks’ prudential regulation, the implementation deadline for the new regulation is set for 1 January, 2025.

A report  by the committee disclosed  that banks will have a two percent limit on Group 2  crypto assets. Assets that are under this category include non-fungible tokens (NFTs), stablecoins and unbacked crypto assets that don’t meet classification conditions.

According to the report, Group 1 assets, which include tokenised traditional assets and crypto assets with effective stabilization mechanisms, have  an exposure limit of 2.5 per cent and are subject to capital requirements based on the risk weights of underlying exposures as outlined  in the existing Basel Framework.

The report further disclosed that the classification conditions set out by the Committee also require crypto assets with stabilization mechanisms to pass a redemption risk test.

These new standards “will provide a robust and prudent global regulatory framework for internationally active banks’ exposures to crypto assets that promotes responsible innovation while preserving financial stability,” the report disclosed.

The report also indicated that the consolidated Basel Framework will be updated shortly to include the crypto standards the committee has set out for regulating the crypto sector, which has been extremely volatile lately.

The core objective of the  redemption risk test is to ensure that the reserve assets are sufficient to enable the crypto assets to be redeemable at all times, while the basis risk test was designed to  ensure that the holder of a crypto asset can sell it in the market for an amount that closely tracks the peg value.

Prior to the endorsement, a group of eight traditional finance lobby groups wrote  to the committee suggesting that a one per cent cap on banks could be too restrictive and could affect  innovations using distributed ledger technology.

Speaking on the endorsement, Tiff Macklem, chairman of the Group of Central Bank Governors and Heads of Supervision (GHOS), and Governor of the bank of Canada said: “Today’s endorsement by the GHOS marks an important milestone in developing a global regulatory baseline for mitigating risks to banks from crypto assets,”

Macklem also emphasised the importance of monitoring bank-related developments in crypto asset markets,while assuring that the Group is ever ready to act further if necessary.