BIS risk committee deems cryptos pose potential risks for global banks

  • By Tom Cleveland

  • March 20, 2019
  • 2:23 am BST

Crypto Winter has come and, hopefully, passed, if recent pricing behavior in our financial markets is any indication of more prosperous times ahead. While 2019 has already witnessed a general appreciation of crypto market caps of roughly 28% and approaching the $140 billion level again, the Bank for International Settlements (BIS), the global standard setter for all banks and banking regulatory bodies, has now stepped forward to proclaim through one of its committees that cryptocurrencies, cryptoassets from their perspective, are now worthy of further due diligence when assessing overall risks.

The Basel Committee on Banking Supervision (BCBS), an arm of the BIS and the “primary global standard setter for the prudential regulation of banks”, issued a statement to its member banks stating that: “A bank’s risk management framework for crypto-assets should be fully integrated into the overall risk management processes, including those related to anti-money laundering and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring.”

The group’s newsletter also noted that cryptoassets today are relatively small in the overall scheme of things and that potential exposures may be small within the global financial system. In any event, it warned that: “Banks should be wary of the dangers that come with cryptocurrencies, as they could have a negative effect on the bank’s liquidity, credit, operations, money laundering, and terrorist prevention measures, as well as its legal status and reputation.”

It is not unusual that the BCBS should be forming this opinion at this time. The Financial Stability Board, an independent global standards body that works in concert with the BIS, had declared a year ago that: “Cryptoassets do not pose risks to global financial stability at this time.” Crypto Winter had just begun at that point, and its ravages have had consequences on both crypto development efforts and crypto exchanges, as well. A wave of failures and consolidations has raised awareness that crypto related entities now pose more potential risk than a year ago.

The BCBS is also known for issuing capital standards for banks in the form of the Basel III Accords, which establish a framework for assessing risks by various formulae applied to a bank’s balance sheet. These calculations then determine an appropriate level of capital for the bank in question, such that liquidity concerns will be addressed in a step-by-step, organized fashion. Up to now, cryptoassets fell within a broad class of “Other Assets”, but the committee felt the time was right to draw attention to this asset class.

The clear message from the BCBS was that: “Any bank that has or plans on having exposure to digital assets should inform relevant supervisory bodies. Apart from disclosing any current or planned assets, banks should also present the authorities with an assurance that it has assessed and mitigated the risks connected with owning crypto.”

While banks contemplate a more due diligence approach to appraising its relationship with a crypto related entity, a situation that most banks in the developed world have shunned or were reticent to support, the BCBS commits that it will continue to work with other standard-setting groups, like the Financial Stability Board, to clarify positions related to cryptocurrencies going forward.