The Basel Committee on Banking Supervision (BCBS) on Tuesday 31 May 2022 in a press release disclosed that it will complete work by the end of the year on the amount that capital banks should reserve to cover cryptoasset losses. In June 2021, the Committee had proposed that banks should be made to set aside enough capital to fully cover losses on any bitcoin holdings.
According to the statement published on the Committee’s website, “[t]he Committee progressed its work towards issuing a second consultation paper on the prudential treatment of banks’ cryptoasset exposures, following its initial consultation last year. Recent developments have further highlighted the importance of having a global minimum prudential framework to mitigate risks from cryptoassets. Building on the feedback received by external stakeholders, the Committee plans to publish another consultation paper over the coming month, with a view to finalising the prudential treatment around the end of this year.”
Earlier last month TerraUSD, a stablecoin tied to the U.S. dollar, collapsed.
Member countries of the Basel Committee have expressed their commitment to applying the principles agreed to their domestic rules. Certain tokens and stablecoins however, remain in the purview of existing capital rules, and will be treated in the same way as bonds, loans, deposits, or commodities.
The other monetary concerns covered in the statement include principles for effective management and supervision of climate-related financial risks, review of the treatment of cross-border exposures within the European Banking Union on the G-SIB methodology, and the risks and vulnerabilities to the global banking system.
Naijacrypto CEO, Chiagozie Iwu, welcomes risk framework for handling stablecoins.
Chiagozie Iwu, CEO of Naijacrypto, responding to the development, had this to say: “I assume that the BCBS are hedging against stablecoin exposures because I doubt the BCBS would encourage commercial banking exposure to volatile crypto assets. If my assumption is right on stablecoins, then the BCBS is justified to create a risk framework for handling stablecoins.”
But Chiagozie Iwu thinks that regulatory frameworks should be put in place for stablecoins before the BCBS comes in. “The BCBS may wait until proper regulatory frameworks that ensure stablecoins have at least a 95% backing are in place. Deposit insurance towards stablecoin needs to also be properly implemented. In this case, measures that are already similar to bank exposures to low-risk money market instruments can be implemented.”
According to Chiagozie Iwu, one of such measures could be “using risk framework similar to that of Basel 3 on bank exposures to money market instrument.”
“In reality, stablecoins done properly are actually liquid money market instruments”, maintained Chiagozie Iwu, a certified cryptocurrency expert who blends knowledge in traditional finance and DeFi.
By now it should no longer be in doubt that whatever significant losses cryptoasset investors or users suffer in the crypto market, regardless of the blockchain involved, this oftentimes attracts the attention of regulators. Consequently, it results in regulatory reactions that eventually affect all operators. The recent TerraUST collapse and Luna crash comes to mind. If the crypto industry is not united in its resolve to collaborate and put the consumers or investors first, regulators will step in to protect consumers and investors, whatever that means for innovation.