Five financial industry bodies have pushed back against the treatment of permissionless blockchains by a global banking supervision authority.
In December, the Basel Committee on Banking Supervision (BCBS) published a report on proposed amendments to bank capital requirements for digital assets, stablecoins, and tokenized assets.
The report classified all permissionless blockchains as high-risk, claiming that some risks could not be mitigated through existing solutions. BCBS was particularly concerned about banks’ lack of control over third parties who conduct most operations on these blockchains. It also warned about their privacy, finality, liquidity, and political, legal, and policy risks.
In response, five global financial industry regulators have defended permissionless blockchains. In a joint response, they stated that the industry “has all necessary expertise and robust compliance frameworks to fully identify, manage and mitigate these risks.”
The five are the International Swaps and Derivatives Association, the Global Financial Markets Association, the Institute of International Finance, the Futures Industry Association, and the Financial Services Forum.
Blockchain’s application in the financial industry is evolving, and regulators must not disincentivize banks from exploring the technology, the regulators stated. By putting up unnecessary hurdles, the BCBS would only push these institutions to the non-regulated shadow banking space, which would be riskier for them.
The regulators further noted that dozens of global banks have conducted successful pilots using permissionless blockchains. These pilots have shed more light on the technology’s application and allowed them to understand and control emergent risks.
The BCBS approach is unfair to blockchain and veers away from the regulator’s long-held “same asset, same risk” approach, they added.
“While we acknowledge that risk mitigation techniques are evolving for permissionless crypto assets…we are confident that solutions already exist in respect of specific use cases,” the five stated.
They believe deciding whether to build on permissionless blockchains should be left to the banks.
The financial sector has been a leader in blockchain adoption, with some, like JPMorgan (NASDAQ: JPM), developing their own permissioned networks, albeit unsuccessfully. However, most have relied on existing solutions to build applications spanning settlement, bond issuance, tokenization, etc.
Watch: Yves Mersch—Regulatory frameworks for digital currency in Europe
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