- BCBS says crypto assets can raise financial stability concerns and pose certain risks to banks
- The committee emphasizes that cryptocurrencies are not a legal tender
- BCBS expects authorized banks to set up a regulatory framework before dealing with cryptocurrencies
The Basel Committee on Banking Supervision (BCBS), an international banking authority stated on March 13th that the continuous growth of cryptocurrencies could lead to an increase in financial stability concerns and pose particular risks to banks, and as such financial institutions need to formulate a risk management framework before dealing with Bitcoin and other blockchain-based virtual currencies.
Crypto adoption a concern
The BCBS in its latest newsletter outlined that cryptocurrencies have seen significant adoption over the years even though their growth cannot be compared to that of the global financial system.
However, the financial oversight committee has opined that the continued growth of cryptocurrency exchanges, as well as crypto related products, comes with certain threats such as an increase in financial stability concerns and risks to banks.
Specifically, the BCBS has stated explicitly that virtual currencies are neither a genuine legal tender nor a store of value and no government or authority backs them. As such, they are unsafe to be used as a medium of exchange and lack the standard function of money.
The BCBS further stated that cryptocurrencies have high price volatility which could result in losses and other potential risks including liquidity risk, market risk, money laundering, and terrorist financing risk, credit risk, amongst others.
Strict guidelines for banks
Against that backdrop, the committee has set expectations for banks interested in venturing into the cryptospace.
For starters, due diligence is required before dealing with crypto assets, and in this case, banks have to carry out an analysis and access the risks that may occur through the use of cryptocurrencies and providing financial services to crypto-based businesses.
Secondly, governance and risk management must be considered, and banks have to set up a clear and robust risk management framework that will be integrated into their overall risk management processes.
These processes also have to be implemented in a way that is consistent with the high-level risks of virtual assets.
Board and senior management executives are to be fully involved in overseeing the framework.
Financial institutions are also required to notify the financial supervisory authority of their crypto-related plans before entering the cryptospace, and the lender must relay this information on time while also confirming that it has assessed the risks mentioned above and how it intends to mitigate them.
The BIS is Still Not Crypto-Friendly
Created in 1974, by the central bank governors of “the Group of Ten” countries, the BCBS is a committee that sets global standards for the prudential regulation of banks. It is supported by the Bank for International Settlements (BIS) which was established in 1930 and is owned by 60 central banks.
While the latest comments of the BCBS may be in a bid to promote investor protection, it goes a long way to show that the BIS still has a somewhat harsh stance towards crypto.
As Blockchain Reporter informed on November 8, 2018, Agustin Carstens, the general manager of BIS stated that cryptocurrency is a Ponzi scheme, bubble, and environmental disaster.