Cryptos pose risk to banks, aren’t currency: Global banking regulator

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The growth of crypto assets poses a risk to traditional banks, a global banking regulator has warned. In its statement, the Basel Committee said that cryptos have the potential to raise financial stability concerns. 

The Basel Committee on Banking Supervision (BCBS) is a committee of banking regulators established in 1974. It provides a forum for cooperation on banking supervisory matters. It also sets some key guidelines and standards in various areas of the banking industry. It’s based at the Bank for International Settlements (BIS) in Basel, Switzerland. 

In the statement, BCBS recognized the tremendous growth crypto assets have experienced in the past few years. Despite the aggressive growth, cryptos still only account for a very small portion of the global financial system. Banks around the world still have very little exposure to this asset class, if any.

Nevertheless, cryptos still pose a threat to the stability of the financial industry.  

The statement also sought to clarify the Committee’s stand on cryptos’ use as a currency.

“While crypto-assets are at times referred to as “crypto-currencies”, the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto-assets are not legal tender, and are not backed by any government or public authority.”

Cryptos are immature at the moment and pose various risks to banks, the statement continued. They include credit risk, liquidity risk, market risk and legal and reputation risk. Banks also stand to face money laundering and terrorism financing risks by using cryptos.

Therefore, any bank that decides to involve itself in cryptos must adopt some measures to mitigate the risks. The first is conducting due diligence on the crypto in question. The bank must ensure that it has the required technical expertise to handle the risks.

With cryptos being “anonymous in nature,” banks must have in place “a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services.” The crypto risk management framework must consider money laundering, evasion of sanctions and funding of terrorism.

Banks must also disclose all their crypto involvements to their regulators, the statement concluded. This will put the regulators in a good position to help the banks mitigate the risks involved.

In the past, the Bank for International Settlements has warned against various aspects of crypto, most recently the Proof-of-Work (PoW) consensus. BIS believes that PoW should be scraped off as it’s prone to a 51 percent attack.