Shearman & Sterling | Fintech 2020 | BCBS Says Crypto-Assets May Pose Risk to Financial Stability
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  • BCBS Says Crypto-Assets May Pose Risk to Financial Stability
    On March 13, 2019, the Basel Committee on Banking Supervision (BCBS) published a statement, cautioning that the continued growth of crypto-asset trading platforms and new crypto-asset related financial products has the potential to raise financial stability concerns and increase risks faced by banks.

    The BCBS stated that it is setting out its prudential expectations related to banks' exposures to crypto-assets and related services, for those jurisdictions that do not prohibit such exposures and services.  In its view, the high degree of volatility, lack of standardization and constant evolution of crypto-assets present a number of risks for banks. As a result, the BCBS expects that if a bank is authorized and decides to acquire crypto-asset exposures or provide related services, the following should be adopted at a minimum: 
    • Due diligence: Before acquiring exposures to crypto-assets or providing related services, a bank should conduct comprehensive risk analysis. Relevant risks include liquidity risk, credit risk, market risk, operational risk (including fraud and cyber risks), money laundering and terrorist financing risk, and legal and reputation risks.
    • Governance and risk management: The bank should have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services.
    • Disclosure: 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.
    • Supervisory dialogue: The bank should inform its supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner. The bank should also provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and explain how it has mitigated these risks.
    Other international standard-setting bodies, such as the Financial Stability Board, have also warned that the evolutionary nature of crypto-assets requires vigilant monitoring and could have implications for financial stability in the future.  While guidance from these organizations is not binding, it may help shape domestic regulation.  It will be interesting to monitor if any jurisdiction may at some point adhere to the BCBS’s suggested minimum standards for the crypto-asset activities of banks.