The Basel Committee has laid out guidelines for banks that plan to enter the cryptocurrency market. While outlining the supposed threats posed by crypto assets in terms of financial stability, the committee has said it expects banks that are going to have direct exposure to the crypto industry to be prudent in their approach. As a minimum requirement, banks should improve their risk management and disclosure processes to reduce risk, it recommended.
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‘Improve Risk Management and Disclosure Processes’
Housed under the Bank for International Settlements, the Basel Committee is a conglomerate of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.
In a statement released on March 13, the global banking watchdog encouraged banks to undertake adequate due diligence and to have a clearly defined risk management framework that combats fraud, money laundering and financing of terrorism. Risks from direct or indirect exposure to cryptocurrencies should be reported in the bank’s internal capital and liquidity adequacy assessment processes. The committee stated:
Before acquiring exposures to crypto assets or providing related services, a bank should conduct comprehensive analyses of the risks. A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.
‘Cryptocurrencies Pose Threat to Financial Stability’
Bank exposure to cryptocurrencies remains relatively low, even when some institutions have started to offer services such as opening business accounts for cryptocurrency businesses as well as buying and selling digital assets for institutional investors. Others, like those in Brazil, have gone the opposite way, shutting down accounts belonging to cryptocurrency exchanges without notice.
In its report, the Basel Committee accused crypto assets, which have continued to grow, of posing a threat to banks and to financial stability. It claimed that cryptocurrencies are not a reliable substitute for money and are unsafe to rely on as a medium of exchange or store of value. Crypto assets are also highly volatile and expose banks to risks including fraud and terrorist financing links, the committee alleged.
“Crypto assets are not legal tender, and are not backed by any government or public authority,” it detailed. “They present a number of risks for banks, including liquidity risk … operational risk (including fraud and cyber risks); money laundering and terrorist financing risk.”
The committee revealed that it is working with other global standard setting bodies and the Financial Stability Board to “clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto assets.”
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