“Every smart person that I admire in the world, and those I semi-fear, is focused on this concept of crypto for a reason. They understand that this is the driving force of the fourth industrial revolution: steam engine, electricity, then the microchip - blockchain and crypto is the fourth.”
- Brock Pierce
As Brock Pierce points out, crypto is a powerful force - likely to be here for the long run. The influence of crypto, the recent collapse of certain crypto firms, and a dramatic fall in the value of cryptocurrencies have prompted high-level advisors worldwide to increase the pressure for crypto regulation moving forward.
Basel, Switzerland, is home to the Bank for International Settlements (BIS), which has recently set limits on banks’ exposure to crypto markets. In June 2021, the Basel Committee released its first consultation regarding the crypto sector, which advised that banks hold sufficient capital to pay for losses on any bitcoin holdings.
As Tiff Macklem (chair of the BIS Group of Central Bank Governors and Heads of Supervision (GHOS)) states:
"Today's endorsement…marks an important milestone in developing a global regulatory baseline for mitigating risks to banks from cryptoassets." He continues: "It is important to continue to monitor bank-related developments in cryptoasset markets. We remain ready to act further if necessary."
An overview of the BIS (Bank for International Settlements)
The Bank for International Settlements (BIS), located in Basel, Switzerland, was established in 1930. The BIS is an international financial organization. It is the oldest functioning organization of its type. Central bankers frequently meet at the BIS to consult on many subjects. Representatives from the G-10 countries comprise the board.
The Basel Committee on Bank Supervision (BCBS) and the Basel Capital Accords (Basel III)
The central bank Governors of the G-10 countries created the Basel Committee on Bank Supervision (BCBS) in 1975. High-ranking representatives from authoritative banking organizations and prominent central banks from different countries. The Committee typically convenes at its permanent Secretariat at the BIS in Basel.
The BCBS is a setting where the Committee can discuss banking supervisory issues regularly. The Committee aims to understand supervisory matters and to enhance the standard of banking supervision globally. Its directive is to tighten all bank's pursuits, supervisory practices, and regulations to ensure financial predictability. The Committee has established regulatory capital norms via capital accords and associated publications, effective since 1988.
The Committee announced a reform package called Basel III (or Third Basel Accord); in June 2010. The Basel Capital Accords are an agreement among the central banks of key industrialized countries that enforces capital requirements on internationally active banks. Basel III is a voluntary set of global reforms created to enhance risk management, supervision, and regulations in banking. Basel III strives for global standards that regulate bank stress testing, capital adequacy, and liquidity risk.
So, why is all this necessary?
The crypto-asset risks
You might be wondering: Why do crypto-assets pose a noteworthy risk? Basically, the swift adoption of crypto-assets and digital asset products within the financial realm might challenge the soundness and safety of finance systems. Federal banking agencies must assess the risks of such products and address how banking organizations can safely be involved in crypto-asset activities. The agencies should offer guidance to the banking field on prudential banking and consumer risk protection concerning crypto-asset ventures.
Dafina Stewart (Senior Vice President, Associate General Counsel Bank Policy Institute) and Andre B. Cotten (Assistant Vice President, Regulatory Counsel Consumer Bankers Association) wrote in a letter addressed to Mr. James P. Sheesley (Assistant Executive Secretary, Federal Deposit Insurance Corporation):
“The sustained growth in digital assets highlights the need for further federal regulatory guidance and the value of increased involvement by banks, which are key components of the domestic and global financial system. The interest in and the use of digital assets by consumers and businesses is here to stay.…Federal banking agencies and banks must also work to manage the potential risks of digital assets, including reducing potential harm to consumers and the wider financial system.”
Finalizing the Basel III Capital Rules
The global financial crisis of 2008 promoted the OCC, FDIC, and the Federal Reserve to modify the regulatory capital framework, thereby creating a more robust banking system. The Basel Committee on Banking Supervision (BCBS) issued two sets of standards, called Basel III, which is the basis of these regulatory changes. The agencies’ first modifications in 2013 focused on the quantity and quality of capital. The agencies are working on the second group of BCBS standards to implement Basel III.
On September 9, the three agencies (OCC, FDIC, and the Federal Reserve) reestablished their commitment to stricter regulatory capital requirements, aligning with the final Basel III standards announced by the BCBS. In 2017 the BCBS issued these standards to tighten capital demands for market risk exposures, enhance the capital demands for financial derivatives, and streamline the calculation of operational risk for regulatory capital intent.
So, why is the BIS’s involvement in crypto markets supervision so significant? Simply put, the BIS will ensure that banks worldwide conform to specific standards regarding digital currency transactions, trading, and more. This regulation will help to mitigate consumer, fraud, and cyber risks.
As we have seen, Basel, Switzerland, is where the discussion regarding the new guidance and recommendations for banks’ exposure to crypto markets will take place. So, Basel and the crypto market are intrinsically linked, and we will likely see discussions on the crypto market in Basel in the future.