Prudential Requirements For Cryptoasset Exposures Amended

The Basel Committee on Banking Supervision (the Committee) has issued amendments to its final disclosure framework for banks to report their cryptoasset exposures. It has also amended its "SCO60: Cryptoasset exposures" standard, as part of the Basel Framework, to clarify the treatment of stablecoins that reference one or more fiat currencies.

Our original summary of the final standard, which was published in December 2022, is here.

The changes published by the Committee follow public input and come on the back of its decision  to delay the global implementation target until 1 January 2026.

Cryptoasset Standard

The key changes to the BCBS cryptoasset exposures standard include the following:

• Cash Deposits

The requirement has been removed for custodian banks to make cash reserves held by them for stablecoins remote from their own insolvency, as well as that of any person who issues, managers, or is involved in the stablecoin operation. This provision was technically inappropriate, because it could have required cash deposits to be placed with other deposit-takers when the bank is only acting in a custodial capacity. As amended, the cryptoasset standard recognises that, in such cases, retention of deposits on the balance sheet of the custodian bank is acceptable.

• Securities Financing Transactions

The amended final standard permits the cash receivable under "very short term reverse repurchase agreements" to be included in the reserves for Group 1b stablecoins; provided that they are overcollateralised by "marketable securities representing claims on or guaranteed by sovereigns and central banks with high credit quality."

In a footnote, the Committee specifies:

The following are excluded from the calculation of eligible reserve assets: (i) cash received from repurchase agreements and similar securities financing transactions (SFTs), which expand the balance sheet and, thus, increase leverage at the stablecoin issuer; and (ii) securities received from collateral swaps, which can allow lower quality or less liquid securities to be temporarily swapped for higher quality or more liquid securities. At national discretion, the cash or securities received from repurchase agreements and similar SFTs as well as collateral swaps may still be permitted provided that sufficient regulatory safeguards, such as unwind mechanisms in the short-term horizon, are in place to avoid these outcomes, and the securities lent or posted in these transactions are not included in the eligible reserve assets calculation to avoid double counting.

• Due Diligence

Banks are expected to perform due diligence on cryptoassets; classifying them in accordance with the scheme set out in the final standard. For Group 1b stablecoins, the Committee has agreed that:

a bank must perform due diligence to ensure that they have an adequate understanding, at acquisition and thereafter on a regular basis, of the stabilisation mechanism of the cryptoasset and of its effectiveness. As part of that due diligence, a bank must conduct statistical or other tests demonstrating that the cryptoasset maintains a stable relationship in comparison to its reference asset (basis risk test). Banks must make available to their supervisors, upon request, the methodology used and the results of such tests, and the supervisors may override the classification based on the test results or the inadequacy of the bank’s methodology.

Disclosure Framework

The Committee has also refreshed its disclosure framework in the following key ways:

• Reporting Requirements and Templates

The Committee has also responded to industry feedback to streamline the templates used for reporting. It had been pointed at that there was a level of duplication in the reporting, but the Committee has elected to maintain requirements that overlap to some extent with Pillar 3 reporting.

• Definition of "Materiality"

The disclosure requirements for "material" cryptoasset exposures have been clarified through the introduction of a two-stage test. For Group 2 cryptoassets, reporting using Template CAE1 will be expected when the following limbs have been met:

Stage 1 would ascertain whether a bank’s cryptoasset exposures are material at an aggregate level. This stage would be met when a bank’s Group 2 exposure limit calculated in accordance with SCO60.116 to SCO60.119 is equal to or greater than 0.3%.

Stage 2 would be met when a bank’s exposure to an individual Group 2 cryptoasset is greater than 5% of total Group 2 cryptoasset exposures.