The Limitation of Crypto Assets in Banks
Basel Committee Report
06 January 2023
The Limitation of Crypto Assets in Banks: Basel Committee Report
Author: Ahmet Demirtaş
Basel Committee published the final version of its second report on the limitation of crypto assets in banks in December 2022. 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.
- Group 1 and Group 2 Crypto Assets Distinction
- Crypto Assets in Group 1
Basel 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 stablecoins.
- Crypto Assets in Group 2
Group 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.
- 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.
- Basel Committee Classification of Crypto Assets as Risky
It 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.
- Current Situation for Banks Operating in Turkey
Basel Committee is an international organisation established in Basel in order to ensure financial stability and to improve the quality of banking supervision. 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.
 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