Joint Associations respond to BCBS second consultation on cryptoasset exposures
04 October 2022 UK
Image: AdobeStock/Tierney
A group of trade associations has published a response to the Basel Committee on Banking Supervision’s (BCBS’) second consultation on the prudential treatment of crypoasset exposures.
The BCBS Second Consultation defines cryptoassets as “private digital assets that depend primarily on cryptography and distributed ledger or similar technology”.
The joint response aims to raise industry understanding of the risks associated with private digital assets to promote an environment for trading and safekeeping cryptoassets that is safer, more efficient and more inclusive.
The report is written by eight industry associations, namely the Global Financial Markets Association (GFMA), the Futures Industry Association (FIA), the Institute of International Finance (IIF), the International Capital Markets Association, the International Swaps and Derivatives Association (ISDA), the International Securities Lending Association (ISLA), the Bank Policy Institute (BPI) and the Financial Services Forum (FSF).
The Associations indicate that they support the design of a robust cryptoasset exposure framework where risks associated with cryptoasset investment are subject to robust capital and liquidity regulation, sound risk management and supervisory oversight.
With this in mind, the Associations encourage a “suitably conservative but appropriately structured and designed regulatory framework” — and they conclude that their goals are closely aligned with the objectives of the Basel Committee in this respect.
It is also important, the Associations argue, that the nascent market in cryptoassets will benefit from advances in distributed ledger technology (DLT), cryptography and other technology innovation, delivering greater transparency, efficiency and speed to trading and post-trade processes.
To this end, the Associations’ have identified some features of the BCBS Second Consultation that might impair banks’ ability to utilise DLT to provide financial intermediation and associated banking functions. This would potentially limit banks' ability to meet customer demand for access to cryptoassets products and services, the group concludes.
To avoid this, the Associations provide recommendations which are designed to promote financial stability — and to improve understanding of risks associated with cryptoasset investment — while avoiding overly restrictive limits to innovation.
It is key, for example, that service providers can avail of the benefits provided by DLT, delivering speed and transparency in transaction processing, along with ability to swap and record assets and cash simultaneously. This offers concrete benefits in enabling faster and more accurate trade settlement, delivering a corresponding reduction in counterparty, settlement and liquidity risk, while bringing greater efficiency to collateral management.
Recent market volatility has highlighted the importance of managing financial activities, including cryptoasset trading, within a well-managed regulatory environment and prudential framework. This, the Associations note, is important to prevent scenarios where financial activities take place against a background of inadequate liquidity, excess leverage and where financial intermediation may be provided by weakly-capitalised service providers.
Without this, there is a danger that cryptoasset services are provided predominantly by “un- or lesser-regulated entities”, says the Joint Associations' statement. “The result would be an unlevel playing field and a lack of transparency in the build up of leverage and risk in the financial system outside of the regulatory perimeter. ” (p 2-3)
Consequently, the Associations commend the position of the Basel Committee and other global standards bodies which apply the “same risk, same activity, same treatment” principle. This implies that a cryptoasset that delivers equivalent economic functions and presents the same risks as a traditional asset should be subject to the same capital, liquidity and other requirements as the traditional asset.
The BCBS Second Consultation defines cryptoassets as “private digital assets that depend primarily on cryptography and distributed ledger or similar technology”.
The joint response aims to raise industry understanding of the risks associated with private digital assets to promote an environment for trading and safekeeping cryptoassets that is safer, more efficient and more inclusive.
The report is written by eight industry associations, namely the Global Financial Markets Association (GFMA), the Futures Industry Association (FIA), the Institute of International Finance (IIF), the International Capital Markets Association, the International Swaps and Derivatives Association (ISDA), the International Securities Lending Association (ISLA), the Bank Policy Institute (BPI) and the Financial Services Forum (FSF).
The Associations indicate that they support the design of a robust cryptoasset exposure framework where risks associated with cryptoasset investment are subject to robust capital and liquidity regulation, sound risk management and supervisory oversight.
With this in mind, the Associations encourage a “suitably conservative but appropriately structured and designed regulatory framework” — and they conclude that their goals are closely aligned with the objectives of the Basel Committee in this respect.
It is also important, the Associations argue, that the nascent market in cryptoassets will benefit from advances in distributed ledger technology (DLT), cryptography and other technology innovation, delivering greater transparency, efficiency and speed to trading and post-trade processes.
To this end, the Associations’ have identified some features of the BCBS Second Consultation that might impair banks’ ability to utilise DLT to provide financial intermediation and associated banking functions. This would potentially limit banks' ability to meet customer demand for access to cryptoassets products and services, the group concludes.
To avoid this, the Associations provide recommendations which are designed to promote financial stability — and to improve understanding of risks associated with cryptoasset investment — while avoiding overly restrictive limits to innovation.
It is key, for example, that service providers can avail of the benefits provided by DLT, delivering speed and transparency in transaction processing, along with ability to swap and record assets and cash simultaneously. This offers concrete benefits in enabling faster and more accurate trade settlement, delivering a corresponding reduction in counterparty, settlement and liquidity risk, while bringing greater efficiency to collateral management.
Recent market volatility has highlighted the importance of managing financial activities, including cryptoasset trading, within a well-managed regulatory environment and prudential framework. This, the Associations note, is important to prevent scenarios where financial activities take place against a background of inadequate liquidity, excess leverage and where financial intermediation may be provided by weakly-capitalised service providers.
Without this, there is a danger that cryptoasset services are provided predominantly by “un- or lesser-regulated entities”, says the Joint Associations' statement. “The result would be an unlevel playing field and a lack of transparency in the build up of leverage and risk in the financial system outside of the regulatory perimeter. ” (p 2-3)
Consequently, the Associations commend the position of the Basel Committee and other global standards bodies which apply the “same risk, same activity, same treatment” principle. This implies that a cryptoasset that delivers equivalent economic functions and presents the same risks as a traditional asset should be subject to the same capital, liquidity and other requirements as the traditional asset.
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