In a statement, the Basel Committee on Banking Supervision (BCBS) condemned cryptos, accusing them of bringing financial stability concerns and increasing risks faced by banks. The committee further established guidelines which it expects its member banks to pursue in any crypto service that they provide.
Located at the Bank for International Settlements (BIS) in Basel, Switzerland, BCBS is an international committee that provides frameworks for regulation of banks, and allows for regular cooperation on banking supervisory matters. BCBS’ regulations are not binding on its 45 member banks, instead it sets banking standards by recommending policy solutions. In its recent statement about crypto assets, the committee has put forward a set of clauses for banks, wishing to adopt cryptos or provide crypto related services.
BCBS says that the gradual rise of the crypto space raises financial concerns for banks and also puts them at a risk. This is true, because Bitcoin offers an alternative to banking system, through an immutable payment processing by establishing a version of trust that is not put on one central body, but rather on a diverse decentralized immutable and secured network, the blockchain. Low transaction costs and high security, heavily favors crypto over the traditional financial systems. Not surprisingly, the BCBS strongly opposes cryptos saying:
“The Committee is of the view that crypto assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto-assets are not legal tender and are not backed by any government or public authority.”
BCBS further categorizes crypto-assets as “an immature asset class” reasoning that the crypto space is always changing and lacks standard, further mentioning:
“They present a number of risks for banks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks”
Cryptocurrencies have continued to show volatility: on the midnight of 2 April 2019, Bitcoin witnessed a surge of 20% in market value which gives an idea how unpredictable crypto market can be. Although blockchain technology provides a strong and a cheap alternative to eliminate mid-parties in the transaction process, cryptocurrencies have been linked to money laundering, terrorist financing and maliciously over the dark web. With over 80% ICOs proven as scam, the prospects of cryptos are taken very cautiously by governments.
BCBS has provided its member banks a guideline that ensures a safe approach towards crypto if the banks plan to adopt it. The committee urges its banks to make a thorough assessment and analyze the risks crypto incurs before actually getting into it. Furthermore, it advises banks to have a “clear and robust risk management framework” which according to the Committee “should be fully integrated into the overall risk management processes” by keeping the board and senior management profiles involved in the risk assessment. It also states that banks should make public disclosures of the materials in the crypto-asset services or exposures and mention the accounting treatment for them. BCBS stresses on staying prepared for the risks. For the purpose, it asks the bank not only to promptly devise risk-mitigating strategies, but also keeping their supervisors well-informed about their plans and actions.
However much of a villain the banks may see in crypto, it is true that banks too are keen to make use of crypto’s incentives, as proved from the introduction of the JPM coin. BCBS’ recent statement that shares guidelines for crypto adoption is another indication. With time, the crypto space is inevitable to become more stable – both in terms of volatility and regulation, and given the right circumstances, crypto can disrupt the banking system.