Consultation response

Basel Committee on Banking Supervision – Cryptoasset standard amendments, December 2023

The Global Financial Markets Association,1 the Futures Industry Association, the Institute of International Finance, the International Swaps and Derivatives Association, and the Financial Services Forum (collectively, the “Associations”) appreciate the opportunity to respond to the Basel Committee on Banking Supervision’s (the “BCBS”) consultative document “Cryptoasset standard amendments” dated December 2023 (the “Consultation”).2

The Associations welcome the BCBS’s continued focus on designing and improving the prudential framework for cryptoassets. We look forward to ongoing collaboration as these markets continue to evolve.

Executive Summary

Public permissionless blockchains – We note the BCBS’s conclusion that the use of permissionless blockchains gives rise to a number of unique risks, some of which cannot be sufficiently mitigated at present. We respectfully disagree with that conclusion. We acknowledge that there are risks with the use of permissionless blockchains but are of the firm view that industry has all necessary expertise and robust compliance frameworks to fully identify, manage and mitigate these risks. Hence, we recommend permitting banks to conduct a Group 1 assessment for permissionless blockchains.

As the uses of distributed ledger technology (“DLT”) are evolving it is imperative not to disincentivise or prevent industry participants from investing in, exploring and innovating in all forms of technology including public blockchains. If banks are prevented from using public blockchains this may encourage the market to focus on the non-bank financial institutions / shadow banking space, which may result in systemic risks outside of the regulatory perimeter. There have been several successful pilot tests which relied on permissionless technologies which have allowed many of the resulting risks to be understood and controlled.

The BCBS’s stance is contrary to the prudential principles of technological neutrality and “same asset, same risk” and may impact on the wider development of liquid tokenisation markets, not least due to the potential lack of interoperability between private blockchains. While we acknowledge that risk mitigation techniques are evolving for permissionless cryptoassets to be assessed for Group 1 cryptoassets, we are confident that solutions already exist in respect of specific use cases. Therefore, as long as banks can satisfy themselves that relevant risks have been addressed, the use of permissionless blockchains should remain possible. We request the BCBS to continue engaging with the industry and share its assessment of permissionless blockchains.

Classification Condition 2 and Settlement Finality – Legal frameworks are in the process of being developed globally to help address settlement finality and private or commercial law considerations for tokenised securities and payments settlement in both primary and secondary markets. We therefore request that the classification condition for a Group 1 cryptoasset related to settlement finality for both primary and secondary markets be made non-prescriptive. In practice, the settlement finality requirement should be deemed satisfied where: (1) the processes as to how and when settlement of the transaction is achieved (whether pursuant to a
bilateral contract or pursuant to the rules or technical processes or conventions of the relevant market, exchange or other venue) is reasonably clear to the bank; and (2) the bank has conducted a review of the settlement process and has concluded to its satisfaction that settlement finality is achieved, or is likely to be achieved in practice. This approach would be consistent with the fact that the use of DLT can assist in mitigating settlement risk in many use cases as recognised by the BIS and the BIS Innovation Hub.3

Group 1b Eligibility – The BCBS’s proposed amendments at SCO 60.12(2)(b)(iv)4 and SCO 60.12(2)(c)(iii)5 would appear not to allow a bank serving as custodian for reserve assets to hold any of the stablecoin’s cash on deposit, whether actual cash reserves or frictional cash that results from the provision of day-to-day safekeeping and asset administration services. Hence, we suggest that while segregation away from the insolvency risk of the custodian can be achieved and should be the objective for securities or other non-cash assets, there should be an exemption for cash (reserve assets) placed or deposited with (1) any prudentially regulated bank or (2) other arrangements which are remote from the insolvency of stablecoin issuers.

In respect of the BCBS proposal that authorities must have the power to apply an infrastructure risk add-on to the capital requirement for exposures to Group 1 cryptoassets, we would like to reiterate that this is unnecessary, given that it seeks to address risks that are already addressed by the existing prudential framework and risk management systems such as operational risk and third-party risk management frameworks, supervisory tools and controls. We urge BCBS to remove the infrastructure risk add-on in its entirety, or otherwise recommend a consistent cross-jurisdictional approach where the use of the infrastructure risk add-on is a last resort.

Finally, as the BCBS kindly stated that it welcomes comments on all aspects of the proposed amendments to the cryptoasset standards, we have suggested certain changes to the regime applicable to Group 2 cryptoassets.

1 GFMA brings together three financial trade associations, including the Association for Financial Markets in Europe (“AFME”), the Asia Securities Industry & Financial Markets Association (“ASIFMA”), and the Securities Industry and Financial Markets Association (“SIFMA”).

2 See Appendix 2 for information regarding each of the Associations.

3 See for example, the BIS CPMI Consultative Report Facilitating increased adoption of payment versus payment, and BIS Innovation Hub Project Helvetia or Project Dunbar.

4 “[The] reserve assets are placed in structures that are bankruptcy remote from any party that issues, manages or involved in the stablecoin operation, or custodies the reserve assets”.

5 Eligible reserve assets include “deposits at high credit quality banks with safeguards, such as: a concentration limit applied at group level that include entities with close links; bankruptcy remoteness of the deposits from any party that issues, manages or is involved in the stablecoin operation; and the banks apply the Basel Framework (including the liquidity coverage ratio).”