Banks’ Exposures to Crypto-Assets: A New International Prudential Standard

In December 2022, the Basel Committee on Banking Supervision (BCBS) finalised its long-awaited standard on the prudential treatment of banks’ exposures to cryptoassets (SCO60).

The standard encompasses banks’ direct and indirect exposures to ‘private digital assets that depend primarily on cryptography and distributed ledger or similar technology’. ‘Digital assets’ are defined as ‘digital representation[s] in value which can be used for payment or investment purposes or to access a good or service’. Central bank digital currencies (CBDCs) are out of scope.

The standard creates two ‘buckets’ of cryptoassets:

• Group 1: Cryptoassets in the form of tokenised traditional assets (Group 1a), and cryptoassets with effective stabilisation mechanisms (Group 1b) that, in both cases, meet in full the classification conditions set out in the standard relating to: (i) cryptoasset characteristics, (ii) legal enforceability and settlement finality, (iii) mitigation and management of material risks, and (iv) regulation and supervision. For so-called stablecoins within the scope of Group 1b, additional conditions apply, including a ‘redemption risk test’.
• Group 2: Cryptoassets that do not fall within Group 1.

For Group 1 cryptoassets, capital requirements apply based on the risk weights of the underlying exposures as set out in the existing Basel Framework, plus an ‘infrastructure risk add-on’ that authorities can activate based on observed infrastructure weaknesses.

For Group 2 cryptoassets, the capital treatment is prescribed in the standard and is described as ‘conservative’ reflecting the additional and higher risks of these assets compared to Group 1. Bank exposures to Group 2 cryptoassets must not exceed 2% of a bank’s Tier 1 capital and ‘should generally be lower than 1%’.

The deadline for jurisdictions’ implementation of the standard is 1 January 2025, and implementation ‘vehicles’ are already being identified in some jurisdictions (eg the European Commission’s proposals for the new CRD/CRR package include a delegated act mandate for the EC for this purpose).

So what is the expected impact in the EU and UK?

In terms of immediate impact, the standard is not expected to impact materially banks’ balance sheets as current exposures to cryptoassets are very limited (eg see the European Banking Authority’s (EBA) response to the European Commission’s Call for Advice on the review of the EU’s macroprudential framework (April 2022), and the Bank of England’s Financial Policy Committee (FPC) report (March 2022)).

However, exposures to Group 1-type cryptoassets are expected to increase over time as:

• the tokenisation of traditional (financial) assets gains in popularity, and
• more so-called stablecoins emerge to market, underpinned by clear regulatory requirements, such as those set out in the EU’s Markets in Crypto-assets Regulation which the Council endorsed in October 2022 and on which a final vote in the European Parliament is expected shortly) and as promulgated at the international level (eg see further the Financial Stability Board’s October 2022 consultation).

In this respect, the standard can be expected to provide important clarity to the market on the approach to the prudential treatment of banks’ exposures to Group 1-type cryptoassets, benefitting both banks and issuers in defining the necessary qualifying conditions in order for banks to apply Group 1 treatment.  

For Group 2, the position is less clear as banks may be expected to continue to exert caution, following recent market turmoil and because, in some jurisdictions, banks’ exposures are already subject to a typically conservative prudential treatment (eg in the EU following the EBA’s January 2019 report).

Regardless, the standard provides important pre-emptive clarity for the market and should facilitate important international consistency, and the Committee will monitor implementation closely taking account of market and policy developments.

Elisabeth Noble is a Senior Policy Expert at the European Banking Authority.

The views expressed in this blog are mine alone and should not be taken to represent those of the European Banking Authority (EBA) or to state EBA policy. Neither the EBA nor any person acting on its behalf may be held responsible for the use to which information contained in this blog may be put, or for any errors which, despite careful preparation and checking, may appear.