BIS Releases Discussion Paper on Designing Prudential Treatment for Crypto-Assets

Yesterday the BIS Basel Committee on Banking Supervision (BCBS) released a discussion paper on “Designing a Prudential Treatment for Crypto-Assets”.

The purpose of the paper is to solicit comments about several principles that the BIS BCBS proposes to employ in designing such a framework.

It’s important to note that the BCBS does not have the legal authority to compel national jurisdictions to accept its rules and regulations.

Rather it relies on its influence as a multi-national organization to secure voluntary co-operation.

In that regard, it is like the FATF/GAFI—which develops standards for anti-money laundering and countering the financing of terrorism. Both are the primary global standard setters for their respective areas of expertise.

The BCBS’s clout derives from its membership – 45 regulators and banking supervisors from 28 jurisdictions across the globe.

Failure of a national jurisdiction to accept BIS or FATF/GAFI standards generally places it “outside” of what are generally accepted norms and places it at a disadvantage to those jurisdictions that accept the standards.

It’s also important to note that the BCBS sets standards for financial institutions and their regulators.

So this exercise doesn’t seek to directly regulate Crypto-Assets but rather banks involvement with this asset class and how national regulators would assess and control the risks that these assets pose to individual banks and national and global banking systems.

Key elements from this paper are:

1. The BCBS assessment that Crypto-Assets do not meet the definition of currency – medium of exchange, store of value, unit of account. Hence the BCBS’s use of the term Crypto-Assets instead of Crypto-Currencies. That may seem like arguing over semantics.  But if the BCBS pronounces that Bitcoin et al are not currencies, it is likely that national regulators will adopt a similar view with consequences for their treatment of these assets.
2. The BCBS view of risks of these assets.
3. The proposed prudential (regulatory) treatment of banking exposures to these assets in view of the perceived risks.

This paper isn’t the final word.  Rather it’s the first step in the process.

The BCBS will publish comments it receives.  Those interested in crypto-assets will find these replies useful in furthering their understanding of this asset class.