Digital Assets Rules For Banks Defined By Basel Committee

Crypto Assets Rules Defined

It has been a while since several banks of the world have entered into the realm comprises of digital currencies and assets alike. So far there were no standard rules prescribed for digital asset exploring banks until now. Resultantly, such banks were operating under their self-defined standards.

Now the rules have been so defined by the Basel Committee whose sole job is of laying down standards for global financial institutions.

Basel Committee has finalized the rules which pertain to financial institutions’ exposure to digital assets.

Outline of Banks’ Standards for Digital Assets

Under the newly defined digital asset standards for the banks, the Committee has divided such assets into two major categories.

Category one shall comprise tokenized assets such as stablecoins. While the other category shall consist of hardcore cryptocurrencies such as Bitcoin, Ethereum, and alike.

The standards have now been officially announced by the Committee on 16th December 2022.

The standards require banks to form a reserve fund out of which the banks can utilize the funds for acquiring digital assets.

Digital Asset Exposure Limits

Committee has laid down a mechanism that provides for 1% of a bank’s Tier-1 capital to be pooled into the reserve. For this pooling, banks are authorized to contribute 1% from stocks and reserves held by the banks.

However, a bank cannot expose itself to digital assets exceeding 2% of assets owned by banks. This means that the banks will not be allowed to invest more than 2% of their total assets into digital assets.

If the banks are allowed to hold higher percentages of assets, they can end up manipulating the markets.

Another major concern is that banks can end up using the funds belonging to their clients to invest in such assets.

As the assets are highly volatile, if they end up facing a demise, then the overall situation can turn quite alarming for the banks.

Application of Rules

While laying down standards, various rules also have been tied up with the standards. For instance, stablecoins are not to be regarded as ‘collateral’ by the banks.

Hence, banks are restricted by a rule that they cannot receive any particular stablecoin as collateral. However, there is no harm if the banks receive cryptocurrencies as collateral because the rules do not restrict them.

Overhauled Standards

It may be noted that though the Committee has defined the standards now but some rules were earlier formed by the Committee. It was in June 2022 when the Committee laid down some rules which received active criticism.

At that time hedging of cryptocurrencies was not contained in the rules. However, no hedging has been duly provided along with a capital charge of 100% on it.

On the occasion, Committee’s Chairman, Pablo Hernandez de Cos who also happens to be Spain’s central bank’s Governor made a few remarks.

He said that laying down the digital asset standards for the banks shows that the Committee has fulfilled its commitment.

He reminded that the Committee had committed to coordinating globally in minimizing the risks to global economic stability.

Deadline for Implementation of Standards Given

Two months ago, the Committee carried out a global survey to find out global financial institutions’ exposure to digital assets.

The survey revealed that the banks, which have stepped into the digital asset industry, owned digital assets worth exceeding $9 Billion globally.

It was after this survey that the Committee took up the initiative of finalizing digital asset standards for the global banking sector.

Now that the standards are in place, the Committee has further given the deadline for when the standards will be made applicable.

The deadline given is 1st January 2025 and till such time the Committee may further amend the standards at its discretion.

However, any future change in the standards will be subject to the Committee’s monitoring of the digital asset industry, clarified Basel Committee.