The Limitation Of Crypto Assets In Banks: Basel Committee Report – Fin Tech

Basel Committee published the final version of its second report
on the limitation of crypto assets in banks in December
2022¹. The first noticeable element in the report is a
categorization of crypto assets as Group 1 and Group 2.

Committee, considering this separation, acknowledges that crypto
assets within the scope of Group 2 are riskier and therefore, as a
rule, the percentage of Group 2 crypto assets should not exceed 1%
of the total assets of banks and if exceeds that rate, Committee
proposed to apply more restrictive rules of Group 2b for the
exceeding part. In addition, it is set forth that if the percentage
of Group 2 crypto assets exceeds 2%, restrictive rules of Group 2b
should be applied for whole crypto assets in banks. In any case, it
is likely that banks will be subject to severe sanctions if they
hold more than 2% of Group 2 crypto assets. In fact, this
percentage was 1% in the previous report, so it seems Basel
Committee took the comments from the sector into account that
criticized the 1% limit alleging it is too restrictive.

1. Group 1 and Group 2 Crypto Assets
   Distinction

1. Crypto Assets in Group 1Basel Committee classifies tokenised traditional assets
   and stablecoin under Group 1 crypto assets and considers them safer
   relatively.

   Tokenised traditional assets: These tokens
   represent the digital version of assets such as shares or real
   property. For example, TSLA.cx token represents Tesla shares and it
   has the same value as Tesla shares.

   Stablecoins: Stablecoins are crypto assets whose
   value is indexed to an external reference (This reference may be a
   currency, commodity or another financial instrument). For example,
   Tether (USDT) and USD Coin are deemed as stablecoins because their
   value is fixed to 1 USD. At this point, it is important to note
   that algorithm-based stablecoins and stablecoins that use protocols
   to maintain their value are not eligible for Group 1. Because there
   are many examples where the price balance is not protected in
   algorithm-based stablecoins².

1. Crypto Assets in Group 2Group 2, on the other hand, are crypto-assets other than
   crypto-assets that meet the standards in Group 1. For example,
   Bitcoin is classified under Group 2.




2. The Rule of Bank’s Crypto Asset Exposure Not
   Exceeding 1%It should be noted that the limitation on banks covers
   crypto assets in Group 2. Banks can hold up to 1% of Group 2 crypto
   assets. However, if the percentage of Group 2 crypto assets is
   between 1% and 2%, then severe conditions in Group 2b are applied
   for the part exceeding 1%. For crypto assets in Group 2b, the bank
   must hold risk-based capital for at least the value of these crypto
   assets.




3. Basel Committee Classification of Crypto Assets as
   RiskyIt is understood from Basel Committee report that crypto
   assets are seen as quite risky. For this reason, the
   above-mentioned limit has emerged. Also, for this reason, Basel
   Committee expects banks to establish an action plan that enables
   them to identify and assess the risks of crypto assets they hold.
   Apart from this, it is foreseen that banks will have a duty to
   information. Banks should inform about their crypto-related
   activities, risk policies, the amount of crypto they hold and the
   capital they allocate for it.




4. Current Situation for Banks Operating in TurkeyBasel Committee is an international organisation
   established in Basel in order to ensure financial stability and to
   improve the quality of banking supervision³. The Central
   Bank of the Republic of Turkey represents Turkey in Basel
   Committee. Therefore, it is inevitable that the criteria above and
   the requirements recommended by Committee probably will be
   implemented in the near future for the banks operating in Turkey.
   For this reason, initiation of a compliance procedure as soon as
   possible could provide significant advantages for banks holding or
   planning to hold crypto assets.

Footnotes

1. Basel Committee Report December 2022 < https://www.bis.org/bcbs/publ/d545.pdf >
Available: 2.1.2023. Hereinafter in this paper, it will be referred
to as “Report”.

2. See: UST Price Balance could not protected and 1 UST
decreased to 0.22 USD <
https://www.aa.com.tr/tr/ekonomi/kripto-para-piyasasinin-lunayi-kurtarma-plani-ise-yaramadi/2586838
> Available: 2.1.2023

3. Basel Committee History, < https://www.bis.org/bcbs/history.htm >
Available: 2.1.2023

Originally published 6 January 2023

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