Basel Committee on Banking Supervision outlines expectations related to banks’ exposure to crypto-assets

Maria Nikolova

Banks should have a clear and robust risk management framework that is appropriate for the risks of their crypto-asset exposures.

The Basel Committee on Banking Supervision has earlier today set out its expectations regarding banks that have exposure to crypto-assets.

The Committee warns that crypto-assets present a number of risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks. Accordingly, the Committee expects that if a bank is authorised and decides to acquire crypto-asset exposures or provide related services, it has to implement a raft of measures.

First, before acquiring exposures to crypto-assets or providing related services, a bank should conduct comprehensive analyses of the associated risks Banks also have to make sure they have the relevant and requisite technical expertise to adequately assess the risks stemming from crypto-assets.

Moreover, banks need to have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services. A risk management framework for crypto-assets should be fully integrated into the overall risk management processes, including those related to anti-money laundering and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring. Board and senior management should be provided with timely and relevant information related to the bank’s crypto-asset risk profile.

In addition, a bank is expected to publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.

Finally, banks are expected to inform relevant supervisory authorities of actual and planned crypto-asset exposure or activity in a timely manner and provide assurance that they have fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how they have mitigated these risks.

The Committee continues to monitor developments in crypto-assets, including banks’ direct and indirect exposures to such assets. The Committee plans to clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto-assets. It is coordinating its work with other global standard setting bodies and the Financial Stability Board.

Although crypto-assets continue to spark regulatory concerns, recent research commissioned by the UK Financial Conduct Authority (FCA) has shown that whereas some harm to individual cryptoasset users is possible, but did not suggest a large impact on wider society. The FCA estimates only 3% of consumers surveyed had ever bought cryptoassets. Of the small sub-sample of consumers who had bought cryptoassets, around half spent under £200.

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