Top Banking Authority: Growth of Crypto Assets Could Pose a Threat to Banks

The Basel Committee on Banking Supervision (BCBS), the international banking supervisory authority, has issued a warning statement on March 13th citing that the robust growth of crypto assets such as Bitcoin, Ethereum, etc. can become a potential threat to the global financial stability and banks which currently have very limited direct exposure to the cryptos.

The Committee has also provided a list of minimum requirements for banks which are in the process of acquiring crypto assets and providing new financial services and products based on digital assets. According to BCBS, if the minimum requirements provided by Committee won’t be fulfilled by the banks, it could raise some serious concerns related to financial stability that may put the banks in a touchy situation.

Diminishing the value of cryptocurrencies, the BCBC said that crypto assets fail as money. The Committee went on to explain further that crypto assets have failed in providing standard functions of the traditional fiat money and it is unsafe to become dependent on such medium of exchange and store of value. Moreover, digital assets are not issued and validated by any government or public authority thus they cannot be considered as legal tender.

Through this statement, the Committee is warning banks that have any direct or indirect exposure to crypto and provide related services, and asking them to revamp the certain aspects of their banking infrastructure including technical support, risk management framework, and governance.

The Committee, which sets global regulatory standards for banks, has described that higher degree of volatility and regulatory issues are the primary concerns which prevent them from being considered as a mature asset class. The BCBS has also pointed out at major number of risks associated with cryptos that banks should worry about. Liquidity risk, money laundering issues, credit and market risk, operational risk, terrorist financing, fraud, legal and reputation risk are some of the potential risks cast by the Committee.

If any bank decides to get direct or indirect exposure to cryptocurrencies or provide related services it should first, at a minimum level, possess the crypto-specific ‘relevant and requisite technical expertise to adequately assess the risks stemming from crypto-assets.’ The bank must provide a rock-solid governance and risk management framework that not only supervise and monitor all the activities but also provide the ‘regular relevant data related to the bank’s crypto-asset risk profile.’

In addition to that, the banks will have to provide public disclosure for any crypto-related services they offer and timely information on crypto-asset exposure or activity.

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