The Holy Grail of Stablecoins: Basel Committee GROUP 1B
The holy grail of stablecoins is the Group 1B designation; specifically those, “Cryptoassets with effective stabilization mechanisms …” That designation is not something achieved in isolation as actions are required by the generator and the market to shepherd any old stablecoin into this holiest of holies.
The Basel Committee on Banking Supervision (BCBS) finalized the Crypto Standard on December 16, 2022, aimed at assisting banks in monitoring and managing their exposure to cryptoassets. While the standard is effective immediately, national regulators are set to implement it by January 1, 2025. It addresses the prudential treatment of banks’ exposures to cryptoassets by categorizing them into two groups (Groups 1 and 2) and includes provisions on infrastructure risk, redemption risk, supervision requirements, exposure limits, and classification assessments. Notable changes from previous proposals include revisions to various aspects such as the infrastructure risk add-on, redemption risk tests, supervision requirements, exposure limits, and the responsibility for assessing classification conditions. The industry anticipates further refinements and clarifications from the Basel Committee to accommodate the evolving nature of cryptoassets and associated risks.
The significant risks associated with crypto-assets, particularly in the context of the seemingly past “crypto winter,” underscore the need for a conservative global prudential framework to safeguard the banking system. The BCBS’s finalized standard on the prudential treatment of banks’ crypto-asset exposures marks a crucial milestone in this regard, providing a harmonized international regulatory approach to balance responsible private sector innovation with sound bank risk management and financial stability.
The BCBS standard categorizes crypto-assets into two groups, with Group 1 comprising tokenized traditional assets and stablecoins with effective stabilization mechanisms, subject to lower risk conditions and capital requirements. Group 2 includes all other crypto-assets, subject to a more conservative capital treatment and an exposure limit of generally below 1% of Tier 1 capital. Supervisory authorities are expected to update their practices to address challenges posed by crypto-related operations, with potential interventions ranging from additional capital charges to limits on risk-taking and business operations. While the BCBS standard is not yet legally binding pending its transposition into the European Union, banks are encouraged to comply with it cautiously and gradually, given the rapid pace of market developments and the emergence of new risks in the crypto-assets space.
Conclusion
As one of the pillars the ultimate stablecoin will rest upon, the Basel Committee Group 1B offers the most clarity around how one will achieve it. We foresee banking rule makers leveraging the definitions in this proclamation when coming up with their own versions of legislation meant to protect banking and customers. Watch this space.
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