Basel Committee Lags the Market in Digital Asset Regulation

Vlad Totia

The Basel Committee on Banking Supervision has announced it is to revert and revisit a set of rules on
capital adequacy requirements for cryptoassets held by banks that were viewed as punitive, resulting in
substantial pushback from a coalition of trade associations and a wide range of other market participants.
The controversial proposals were for banks to reserve capital to cover the value of cryptocurrency holdings
in full. This requirement would equate cryptocurrencies to the very riskiest assets, including those for which
banks lack the information to calculate exposures.
The coalition argued that this capital requirement would make it economically unviable for banks to
participate in this market, and put them at a competitive disadvantage while hindering progress towards a
digital future for the financial services industry.
The BIS has overshot in its attempt to create a legal framework for the market and push institutional
adoption and use of digital assets. While there clearly is an argument for the responsible management of
an inherently volatile asset by financial institutions, the strong market resistance shows that there is a lot
more appetite for innovation in the private sector.
The market is running ahead of regulators in this regard, but approaches vary between those banks that
are pushing ahead with digital asset engagement – potentially building competitive advantage but exposing
themselves to risk as regulation catches up – and those that are holding back pending regulatory clarity.
The longer it will take to have a functioning framework, the more difficult it will be for the ecosystem to
develop robust common standards. With the BIS scheduling its next consultation for next summer, banks
and other market participants are now facing the prospect of another year’s delay.
The Committee will now reassess its proposals and has stated: “Members reiterated the importance of
developing a conservative risk-based global minimum standard to mitigate prospective risks from
cryptoassets to the banking system, consistent with the general principles set out in the consultative
document. Accordingly, the Committee will further specify a proposed prudential treatment, with a view to
issuing a further consultative document by mid-2022.”