Prudential requirements for exposures to cryptoassets

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The Basel Committee on Banking Supervision (BCBS) —the primary global standard setter for the prudential regulation of banks— has published an executive summary for the applicability to the cryptoassets of the Pillar 1, 2 and 3 of the Basel Framework on the prudential treatment of cryptoassets banks’ exposures. This is a publication related to the standard on the prudential treatment of cryptoasset exposures, done by the same Committee in December 2022.

Below is a high-level summary of this document:

  • Pillar 1 focuses on Risk Based Capital (RBC) for credit, market and operational risks, and other applicable elements (liquidity standards, leverage ratio and exposure limits), where:
    • Group 1 subjects to capital requirements based on Risk Weights of underlying exposure; and Group 2 requires additional capital requirements. Group 2a requires 100% capital charge (except hedge recognition) and Group 2b RW of 1,250%.
    • Standard approach applied in Operational Risk.
    • LCR and NSFR treatment consistent with current methods for traditional exposures. Only Group 1a can be considered HQLA. Groups 1b and 2 cannot be considered HQLA.
    • A Leverage Ratio is allowed according to exposure measure (accounting treatment).
    • On the exposure limits, Group 1 subjects to the same limits as large exposures standards; Group 2 subject to a limit of 2% (max. exposure) of Tier 1 capital although, it should not exceed 1%.
  • Pillar 2, on the banks and supervisors' responsibilities
    • Responsibilities for banks and supervisor on the establishment and review of policies and procedures to identify, assess and mitigate risks as well as gap identified.
  • Pillar 3, on bank disclosures, where banks must disclose information regularly on any material cryptoassets Group.

The BCBS expects that banks in BCBS member jurisdictions adopt the Prudential Standard by January 2025. The Basel Committee has said that it will be monitoring the implementation of this prudential treatment, as priority initiatives on the digitalization of finance for 2023-2024.

Now, we are asking, is the banking sector ready for the Prudential Standard implementation? What is expected from EU local regulators?

In the following article, we provide our view on the potential next steps on the prudential treatment of cryptocurrencies for banking sector.