Regulation of banks' exposures to crypto-assets

The standard is set out in a new chapter of the Basel Committee's joint framework, SCO60, which is effective from 1 January 2025. Given the rapid pace of market developments, the Committee noted in the publication that it is likely to issue further clarifications and explanations of the standard in time to ensure uniform understanding and application. It was also noted that the Committee has agreed on a set of issues that will be subject to specific monitoring and review. Given the revision work undertaken in 2023, the Committee proposes the following amendments to the cryptoasset standard in this consultation paper: 

• A set of changes to the requirements that determine whether banks may include stablecoins on which they hold investments in the Group 1b category. These changes relate to the composition of the reserve assets of stablecoins and the use of statistical tests by banks to assess the stability of the market value of stablecoins. 
• Various technical amendments to promote a common understanding of the cryptoasset standard. Appendix 1 outlines specific changes to SCO60 to implement the proposed changes. Appendix 2 lists frequently asked questions and answers (FAQs) that the Committee believes should be added to SCO60. The Committee welcomes comments on all aspects of the proposed amendments to the cryptoasset standard from interested parties

Proposals to amend the cryptoasset standard, especially those relating to stablecoins, aim to establish stricter criteria for inclusion in Group 1b. Here are the aspects being considered:

• Low volatility: 
  In order for a stablecoin to be deemed eligible for inclusion in Group 1b, its reserve assets must exhibit low price volatility. This ensures that the assets are stable and can be easily exchanged without significant negative price impact, even in stressful market conditions.
• Active and Significant Market: 
  Stablecoin reserve assets should be traded in large, deep and active markets. This ensures that there is a reliable source of liquidity, which is important, especially in times of market stress.
• Certainty and ease of valuation: 
  Reserve assets should be easily valued and the formula for determining their price should be simple and transparent. If the price of a reserve asset is determined by a formula, the formula should be simple to calculate and should not depend on strong assumptions. The input parameters to the valuation formula should also be publicly available.

The Basel Committee's proposals regarding the use of statistical tests to assess the effectiveness of stabilisation mechanisms for stablecoins are aimed at improving the transparency and reliability of banks' investments in crypto-assets. Here are the key aspects of the proposed changes:

• Due diligence of stabilisation mechanisms: 
  Banks should conduct due diligence to ensure that they adequately understand the stabilisation mechanisms of steiblcoins when acquiring them and on a regular basis thereafter. This is important to minimise risk and ensure investment stability.
• Performing statistical tests: 
  Banks should perform statistical or other tests that demonstrate the stability of a crypto asset's ratio compared to its underlying asset. This will help to determine how well the stabilisation mechanisms are working and how reliably stable the stablecoins remain.
• Providing test results: 
  Banks should provide the results of the tests conducted upon request by supervisors. This will allow supervisors to assess the effectiveness of the stabilisation mechanisms and revise the classification of the cryptoasset based on the findings.

Requirements for cryptoasset stabilisation mechanisms:

• Risk management is similar to traditional assets: 
  A cryptoasset stabilisation mechanism should provide risk management at a similar level as for traditional assets, based on sufficient data or experience. For new cryptoassets, there may not be sufficient data or practical experience, so banks should document the assessment they have made and the evidence used on the effectiveness of the stabilisation mechanism.
• Repurchase risk test and regulatory oversight: 
  A cryptoasset must pass the risk of redemption test and the issuer must be subject to oversight and regulation by a supervisory authority. This provides an additional layer of protection and transparency for investors.
• Exploring the possibility of using statistical tests to identify low-risk stablecoins: 
  The Basel Committee is exploring the use of statistical tests to reliably identify low-risk stablecoins. This may become an additional requirement in the future after further research.

Reserve asset management:

• Reserve assets should be managed to ensure that all cryptoassets can be redeemed quickly at face value, even during periods of extreme stress.
• A strong operational risk and resilience management framework is in place to ensure that reserve assets are available and securely held.
• The mandate defining the types of assets that can be included in the reserve should be publicly disclosed and up-to-date.
• A risk management framework is in place to assess and monitor reserve asset risks, including market, credit, concentration and liquidity risks.
• The composition and value of reserve assets should be published regularly and they should be subject to an independent external audit on an annual basis.

Classification of a bank's cryptoasset exposures:

• A bank's cryptoasset exposure may correspond to one of several options, including direct ownership of a Group 2 spot cryptoasset, derivatives or funds/certificates referencing Group 2 cryptoassets, and other options.
• For the purposes of calculating counterparty default risk for derivative financial instruments whose underlying assets are Group 2 cryptoassets, the exposure value is determined in accordance with a defined formula.

Basel Committee. Standard on prudential regulation of banks' exposures to crypto-assets. https://www.bis.org/bcbs/publ/d545.htm