Basel revises the bank’s cryptocurrency plan to include blockchain

Representations of the virtual currencies Ripple, Bitcoin, Etherum and Litecoin are seen on a PC motherboard in this illustration image, February 14, 2018. REUTERS / Dado Ruvic / Illustration / File photo

LONDON, June 30 (Reuters) – Banks should take a conservative approach to setting aside capital to cover risks from “unsupported” cryptocurrencies on their books, the Global Basel Committee of Banking Regulators said in a proposal Thursday as well as covers block chain.

Cryptoactive assets have fallen in value in recent weeks, partly triggered by the collapse of terraUSD, a stable currency whose value was derived from complex algorithmic processes.

As a result, regulators such as the Basel Committee are concerned about the potential risk to the financial system from the easily regulated crypto sector, although it is still small in relation to the size of global equity, bond and derivatives markets.

The proposals on Thursday mark Basel’s second public consultation on cryptocurrencies, which will require banks to take a conservative stance when allocating capital to cryptocurrencies.

The committee’s proposal said that cryptocurrencies that are not backed by assets such as traditional currencies, and stack coins that do not have effective stabilization mechanisms, should continue to be subject to conservative prudential treatment with regard to capital set aside for potential losses.

It also proposed a new limit on gross exposures to such cryptocurrencies.

In June last year, Basel had published a first consultation on the crypto sector, which suggested that banks must hold enough capital to cover losses on any bitcoin holdings in full.

Basel said it retained the basic structure of the first proposal, which divided cryptocurrencies into two broad groups, one including stable coins and the other higher-risk cryptocurrencies, which would require more conservative capital management.

The latest Basel proposals include new elements such as additional capital to cover “evolving risks” from distributed ledger technologies or blockchain, which underpin cryptocurrencies.

The committee said it would continue to monitor market developments to see if the proposals needed to be further tightened.

The committee, which consists of bank regulators from the world’s most important financial centers, said it plans to complete the rules by the end of the year.

Reporting by Huw Jones. Edited by Jane Merriman

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