On 15th of February 2023, the ECB issued its supervision newsletter issue on the prudential treatment of crypto-assets under the agreed principles developed by the Bank for International Settlements (BIS) and Basel Committee on Banking Supervision (BCBS).
The newsletter starts by shedding light on the ECB’s current standing in the world of crypto-assets by stating that if a bank were to acquire exposures to crypto-assets, either directly or indirectly, they would face significant risks not specifically covered by the current prudential framework. In this sense, it subscribes to the idea of a conservative global minimum prudential framework to minimise the associated risks with reference to BCBS’ standard on the prudential treatment of banks’ crypto-asset exposures. The BCBS standard is seen as complementary to the Markets in Crypto-Assets Regulation (MiCA), with the next development step being the transposition of the Basel standard into the EU and other Basel jurisdictions by the deadline of 1st of January 2025.
In essence, the BCBS standard divides crypto-assets into 2 groups. Group 1 includes tokenised traditional assets and crypto-assets with effective stabilisation mechanism (stablecoins). Group 1 crypto-assets are subject to capital requirements based on the risk weights of the underlying exposures (i.e. the traditional assets) as set out in the existing Basel Framework. Group 2 includes all crypto-assets that do not meet the 4 classification conditions of Group 1 crypto-assets. Since these crypto-assets pose additional and higher risks in comparison to Group 1 crypto-assets, they are subject to a newly prescribed conservative capital treatment with a risk weight of 1250%. With an additional measure, the BCBS standard establishes an exposure limit. Under this limit, the total amount of Group 2 crypto-assets a bank can hold is constrained generally to be below 1% of Tier 1 Capital. While the BCBS standards are still not legally binding and are pending transposition in the EU, it is to be expected that in the future the BCBS will likely issue additional refinements or clarifications to the framework to ensure a consistent understanding and implementation of the standards, or to address any emerging risks.
