The Basel Committee convened over July 2-3 to finalize policy decisions, notably addressing the disclosure of banks’ exposure to cryptocurrencies. These decisions are integral to the ongoing Basel III reforms initiated in 2019, aimed at bolstering the resilience of European Union banks through enhanced regulation, supervision, and risk management.
In December 2022, a framework for disclosing banks’ crypto assets was introduced and subsequently opened for public feedback in May 2023. This framework includes targeted adjustments to the original proposal alongside revisions to the prudential standards concerning stablecoin holdings.
The journey towards regulation has been arduous and complex. The emphasis on disclosure aims to improve transparency and foster market discipline. The updated standards are slated for release later this month, as stated in a recent announcement by the Bank for International Settlements (BIS).
The committee’s scrutiny of banks’ exposure to cryptocurrencies dates back to 2019. By 2021, it had suggested categorizing crypto assets within its high-risk Group 2 asset set, assigning them a risk weight of 1,250%. This classification necessitates that banks maintain capital reserves equivalent to the value of their crypto exposure, with holdings in Group 2 restricted to under 1% of their Group 1 assets.
Stablecoins received a new classification, 1b, which initially did not impose additional requirements beyond those for Group 1 assets. However, stablecoins with perceived ineffective stabilizing mechanisms were categorized under Group 2. The industry’s response to these proposed restrictions was lukewarm at best.
In December, the committee put forth further proposals, including introducing a maximum maturity limit for banks’ reserve assets and mandating overcollateralization of stablecoin holdings to mitigate the risk of depegging.
Additionally, the committee deliberated on the prudential implications of banks issuing stablecoins, determining that these risks are broadly covered under the Basel Framework. Ongoing monitoring of this sector remains a priority.
In tandem with the new Basel standards, stablecoin issuers must adhere to the regulations outlined in the Markets in Crypto-Assets (MiCA). The Basel Committee on Banking Supervision operates under the auspices of the BIS, guided by the central banks of the Group of 10 countries. Adjustments to the current Basel III standards are scheduled to take effect on January 1, 2026, having been postponed from January 1, 2025.
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Source: Bank for International Settlements