Basel Committee Update: Crypto Exposure Regulations Set for 2024

The Basel Committee update heralds the release of new standards in late July, concluding a years-long effort to address the regulation of banks’ crypto exposure. This initiative is part of the broader Basel III reforms, initiated in 2019 to enhance the resilience of European Union banks through improved regulation, supervision, and risk management.

Policy Decisions and Disclosure Framework

During a meeting held on July 2-3, the Basel Committee made significant policy decisions, including the disclosure requirements for banks’ crypto assets. These decisions are integral to the Basel III reforms. In December 2022, a disclosure framework for banks’ crypto assets was proposed, and in May 2023, it was opened for public comments, according to news sources. The proposed framework includes specific amendments to the original proposal and updates to the prudential standards for stablecoin holdings, as well as considerations for prominent cryptocurrencies like Bitcoin and Ethereum (BTC ETH).

 The aim is to ensure that banks have adequate measures to manage the risks associated with crypto assets and enhance the financial system’s overall stability.

Enhancing Transparency Through Disclosure

Disclosure aims to improve transparency and promote market discipline. The updated standards will be published later in July, as per a statement from the Bank for International Settlements (BIS). The Basel Committee’s focus on banks’ crypto exposure began in 2019. By 2021, it had proposed classifying crypto in its high-risk Group 2 asset category, which would impose a 1,250% risk weight, requiring banks to hold capital equivalent to their crypto exposure. Additionally, Group 2 holdings were limited to less than 1% of the value of their Group 1 holdings.

Stablecoin Designations and Industry Response

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Stablecoins received a new designation of 1b, which did not impose additional requirements on banks’ holdings beyond those for Group 1 assets. However, stablecoins with “ineffective stabilisation mechanisms” were placed in Group 2. The proposed restrictions received a lukewarm response from the industry. In December, the Basel Committee suggested introducing a maximum maturity limit for banks’ reserve assets and overcollateralizing stablecoin holdings to mitigate potential de-pegging risks. This move was aimed at addressing the inherent volatility and risks associated with stablecoins, ensuring that banks maintain a robust capital buffer.

The Basel Committee also examined the prudential implications of banks issuing stablecoins, concluding that “the Basel Framework broadly captures these risks,” but committed to ongoing monitoring of the area. Alongside the new Basel standards, stablecoin issuers must comply with the Markets in Crypto-Assets (MiCA) regulations. These regulations are designed to create a comprehensive framework for digital assets within the European Union, ensuring consistent regulatory treatment and enhancing investor protection.

The Basel Committee on Banking Supervision operates under the support of the BIS, but its governance and agenda are directed by the central banks of the Group of 10 countries. The news sources report that the changes to the current Basel III standards are scheduled to take effect on January 1, 2026, after being postponed from the original date of January 1, 2025.

Conclusion

The latest crypto update of the Basel Committee represents a significant step in the regulation of banks’ crypto exposure, aiming to enhance transparency, promote market discipline, and manage the risks associated with crypto assets and stablecoins. The forthcoming standards will provide a clearer framework for banks, ensuring they are better prepared to handle the complexities of the evolving crypto landscape. This Basel Committee update is a critical development for the financial industry, as reported by The BIT Journal, marking a pivotal moment in the integration of crypto assets into traditional banking regulations.