RIO DE JANEIRO, BRAZIL – Despite its skeptical approach to digital currencies, exacerbated by the recent cryptocurrency market crash, it looks like the Basel, Switzerland-based Bank for International Settlements (BIS) intends to extend its hand to the new asset class by allowing banks to hold up to 1% of reserves, which amounts to over US$1.8 trillion in total, in cryptocurrencies such as Bitcoin (BTC).
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that “fosters international monetary and financial cooperation and serves as a bank for central banks.”
Indeed, BIS’s Basel Committee on Banking Supervision (BCBS) has proposed limiting the banks’ total exposures to “Group 2 crypto assets to 1% of Tier 1 capital” in its consultative document titled “Second consultation on the prudential treatment of crypto assets,” published on June 30.
GROUP 1 VS GROUP 2
Specifically, Group 2 refers to the assets that do not meet classification conditions and includes specific tokenized traditional assets, stablecoins, and unbacked crypto assets. As opposed to Group 2, Group 1 includes tokenized traditional assets and stablecoins that meet classification conditions.
According to the document:
“Banks’ exposures to Group 2 crypto assets will be subject to an exposure limit. Banks must apply the exposure limit to their aggregate exposures to Group 2 crypto assets, including both direct holdings (cash and derivatives) and indirect holding (i.e., those via investment funds, ETF/ETN, special purpose vehicles).”
The document also specified that “a bank’s total exposure to Group 2 crypto assets must not be higher than 1% of the bank’s Tier capital at all times,” in line with the Basel Framework, which includes all the BCBS’s standards. As it explained:
“The large exposure rules of the Basel Framework are not designed to capture large exposures to an asset type, but individual counterparties or groups of connected counterparties. This would imply, for example, no large exposure limits on a crypto asset where there is no counterparty, such as Bitcoin.”
With this in mind, “the Committee proposes to introduce a new exposure limit for all Group 2 crypto assets outside of the large exposure rules.” Meanwhile, this provisional limit set at 1% of Tier 1 capital would be reviewed periodically.
BIS was using the recent crypto market collapse to affirm its skeptical attitude towards the assets class and warn about the materialization of its predictions about the dangers of decentralized finance (DeFi).
On top of that, the global central bank body released in early June a bulletin in which it presented its view that “crypto cannot fulfill the social role of money,” listing several problems it perceived in the crypto and blockchain industry, including high fees and network congestion that lead to the landscape fragmentation.