Potential Impacts of Banking Regulators' Crypto Treatment Proposal
On June 10, 2021, the Basel Committee on Banking Supervision, which sets minimum standards for international banks, published a public consultation paper on how banks will be required to allocate capital on cryptocurrency positions, loans, and other exposures. The paper is notable as the proposed treatment of crypto is very punitive on what is categorized as Group 2 cryptos, which would effectively include all cryptocurrencies that are not stablecoins. While such treatment of crypto would be quite conservative, we are not surprised by this as the Committee has been hinting for some time that this would be the likely outcome.
The proposal provides substantially more details on stablecoins than we have seen before and the rules could pose real challenges for banks wishing to participate in crypto activities. As part of the proposal, cryptocurrencies will be divided into Group 1(a) - Tokenized assets, Group 1(b) - Crypto with stabilization mechanisms, and Group 2 - All other crypto. Group 1(a) assets will be treated as a look through to the underlying assets (ex: a tokenized loan will carry the same risk weighting as the equivalent loan), with add-ons for operational risk, such as security interests and legal challenges.