The Basel Committee on Banking Supervision (BCBS) of the Bank of International Settlement has approved its global crypto banking regulations, which is expected to go into effect on the 1st of January 2025. The approval is contained in a 36-page publication released by the (BCBS).
The committee, which serves as the main international standard-setter for the prudential regulation of banks, advised in an accompanying document that a bank’s exposure to certain crypto assets should ideally be lower than 1% and not exceed 2%.
These specific assets are traditional assets that have been tokenized, such as non-fungible tokens, stablecoins, and unbacked crypto assets that don’t fit into any one category. According to the present Basel Framework, the assets from the list above that fit the criteria “are subject to capital requirements based on the risk weights of underlying exposures.”
The committee had previously received a letter from a group of eight traditional banking lobby groups warning that a 1% bank ownership cap might be too onerous and stymie distributed ledger technology advancements.
Speaking on this endorsement, the Chairman of the GHOS, the oversight body of the Basel committee, Tiff Macklem, stated: “Today’s endorsement by the GHOS (Group of Central Bank Governors and Heads of Supervision) marks an important milestone in developing a global regulatory baseline for mitigating risks to banks from crypto assets.”
As part of the criteria the committee has established for classification, cryptocurrency must pass a base risk test and a redemption risk test. The purpose of the redemption risk test, according to the paper, is to make sure that the reserve assets are enough to allow for the perpetual redemption of the crypto assets. As for the basis risk test, the publication stated that it “aims to verify that the holder of a crypto asset can sell it in the market for an amount that closely reflects the peg value.”
Considering how volatile the cryptocurrency market has been recently, regulators have been cautious in their approach. Within a year of Terra, FTX, and their associated businesses and tokens failing, billions of dollars were wiped out of the cryptocurrency market.
The consolidated Basel Framework will soon include the committee’s crypto criteria, according to the document. Individual jurisdictions will decide whether or not to implement these rules.
What you should know about Basel Committee
The Basel Committee on Banking Supervision (BCBS), which sets the majority of international standards for prudential regulation of banks, also serves as a common platform for collaboration on banking supervisory issues. Its 45 members include bank supervisors and central banks from 28 different countries.
This committee was founded to promote global banking supervision of higher standards and to provide a stable platform for member nations to work together on banking supervisory issues. Its goals are to increase financial stability and promote global banking supervision.
The Basel committee is one of the arms of The Bank for International Settlements (BIS). The BIS is a global financial institution that fosters worldwide monetary and financial cooperation and functions as a bank for central banks and is owned by central banks. The BIS carries out its function through the Basel committee by hosting and promoting interactions between international groups working to promote global financial stability.