Cryptoassets banking regulatory proposals

The Global Financial Markets Association (GFMA), and other financial associations jointly responded to the Basel Committee on Banking Supervision’s regulatory proposal on the “Prudential treatment of cryptoasset exposures”. The Associations support the Basel Committee’s initiative but suggest several recommendations to help to realize the benefits derived from underlying cryptoassets technology into the real economy, to facilitate banking involvement in cryptoasset markets and to appropriately regulate a level playing field implementing a minimum global standard in this area.

The main highlights of the formal response are as follows:

• Level playing field across the globe: The associations welcome the Basel Committee’s continued focus on designing a prudential framework for cryptoassets, supporting the need for prudential regulatory certainty in the near to medium term, particularly given the pace of evolution and client demand for cryptoassets. In this regard, it will be very relevant to have a minimum global standard, supported by coordination across jurisdictions to ensure a consistent approach.
   
• According to the associations, banks’ exposures to cryptoassets are currently limited, even though these assets have grown exponentially over the last several years.
   
• However, banks involvement in the cryptoassets market would be positive for several reasons including “improvements to system stability”:
  
  -The underlying technology for cryptoassets, distributed ledger technology (DLT), holds promise to make it possible to deliver financial services more quickly, securely and at lower cost. The new regulation should help to realize the benefits that DLT can deliver across the real economy.
  
  -It will be positive for financial stability: the public and the regulatory community would benefit from bank involvement in the cryptoasset space: higher transparency, lower fragmentation, risks systems in place, including higher standards on anti-money laundering. All this is very relevant bearing in mind that currently the rapid growth of cryptoassets market activity is taking place with participants that fall outside the perimeter of prudential and market regulations.
  
  -There is significant demand for products and services related to these crypto assets from customers, and the prudential framework should avoid precluding banks’ ability to meet that demand
   
• However, the associations consider that the regulatory proposal as currently designed would create material impediments to banks participation in cryptoasset markets as it will be cost-prohibitive from a capital perspective. For example, a more granular differentiation of cryptoassets is needed to capture the different characteristics and risks more appropriately. The associations believe that a novel operational risk capital buffer is unnecessary, since existing and future operational risk frameworks are already capable of taking into account such risks. In summary, digital cryptoassets should have a similar treatment as their equivalent traditional ones.