Risk Management

Banks Warned on Crypto-Asset Exposures

The Basel Committee on Banking Supervision said cryptocurrencies pose a litany of risks for banks, and any material holdings need to be publicly di...
Vincent RyanMarch 13, 2019
Banks Warned on Crypto-Asset Exposures

The Basel Committee on Banking Supervision (BCBS) on Wednesday provided some clarity to financial institutions about the dangers it thinks crypto-assets pose to the global financial system. It also gave some details of the steps banks need to take to manage any exposures to them.

The BCBS, the international standard setter for banking, cautioned institutions about acquiring exposures to crypto-assets or providing related services, saying “the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets” could raise concerns about financial system stability.

Given crypto-assets’ high degree of price volatility and lack of standardization, the BCBS said, banks holding such assets need to adopt governance and risk management practices around them as well as publicly disclose any direct or indirect exposures.

The statement from the Basel Committee said crypto-assets, also called cryptocurrencies, pose a litany of risks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risks; and legal and reputation risks.

Currently, banks have very limited direct exposures to crypto-assets, the BCBS noted. Before a bank dips its toe in, the BCBS said, it needs to conduct a comprehensive analysis of all the above risks and ensure it has the technical expertise to adequately gauge them.

Given the “anonymity and limited regulatory oversight” of many crypto-assets, a bank’s risk management framework for crypto-assets should be fully integrated into its overall risk management processes, the BCBS said, including those related to anti-money laundering and fraud monitoring.

Boards of directors and senior management teams should get timely updates related to a bank’s crypto-asset risk profile, and risk assessments need to be incorporated into any evaluation of a bank’s capital and liquidity levels, the BCBS said.

Finally, the BCBS also specified that a bank “should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures.” It would also need to specify the accounting treatment for such exposures, according to the BCBS.

The committee said it would continue to monitor banks’ direct and indirect exposures to such assets and at some point “clarify the prudential treatment of such exposures to appropriately reflect the high degree of risk.”

In the United States, the Federal Reserve Board of Governors has been somewhat reluctant to tackle the question of how to regulate crypto-assets. In public statements, Fed chair Jerome Powerll has taken a dim view of the need to devise new regulations for cryptocurrency, saying, that “from a monetary policy standpoint the implications are not large, certainly in the near term.” He has also pointed out that cryptocurrencies are not being used for large payments and that they are not proving successful as a store of value.

The Fed indicated on March 1 that it may include the collapse of the bitcoin market in the market scenarios it uses to stress test banks’ balance sheets.

Mark Carney, governor of the Bank of England, last year said that crypto-assets could pose risks to financial stability if they became more widely used “without material improvements in conduct, market integrity, and cyber resilience.”