UK banking regulator asks firms to tell digital asset exposure

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The United Kingdom Prudential Regulation Authority (PRA), responsible for regulating and supervising the country’s banking sector, has requested that businesses disclose any exposure to digital assets by March 2025 to inform its work and help shape policy. 

In a statement, the PRA announced it was “seeking to gather information of firms’ current and expected future cryptoassets exposures,” as well as how they apply the Basel framework for the prudential treatment of digital assets.

“This will inform work across the PRA and the Bank of England on cryptoassets by helping us calibrate our prudential treatment of cryptoasset exposures, analyze the relative costs and benefits of different policy options and providing an updated view of firms’ current and intended cryptoasset-related business activities as a base from which to monitor the financial stability implications of these assets,” the PRA said.

The regulator requested firms to take into account any future plans of digital asset exposure up to September 30, 2029. 

To help with this reporting, the PRA provided a questionnaire for firms detailing several key areas it wants businesses to address, including how they are using permissionless blockchains, of which the form noted:

“While there are benefits that these new types of ledgers can bring, they also pose risks such as lack of settlement finality, settlement failure, and no guaranteed link between the intended owner of the asset and the entity that may have control of the authentication, validation mechanism.”

For this reason, the PRA emphasized that the use of permissionless blockchains “cannot be sufficiently mitigated at present” and listed this classification as remaining under review. 

In addition to current and future exposure to digital assets, the PRA also requested information on how firms were using the Basel framework, which was introduced in December 2022 by the Basel Committee on Banking Supervision (BCBS)—a global standard-setting authority for the prudential regulation of banks—and outlines capital and risk management requirements for banks’ exposure to digital assets.

Basel framework

The ‘Basel framework for the prudential treatment of cryptoassets’ establishes guidelines for banks’ exposure to “cryptoassets,” which it classifies into two groups: Group one includes stablecoins and tokenized assets, while Group 2 encompasses assets such as unbacked tokens and digital currencies.

Each group is subject to specific capital and liquidity requirements; for example, Group one assets must meet standard Basel requirements, including stringent risk management and transparency criteria, with potential add-ons for infrastructure risks. Group 2 assets, deemed riskier, face higher capital charges, including a 1250% risk weight for unbacked digital assets, ensuring stringent safeguards.

‘Risk weight’ refers to a percentage value assigned to an asset to reflect its risk level relative to default or loss. It determines the amount of capital banks must hold as a buffer for specific exposures. A 100% risk weight means a bank must hold capital at least equal to 8% (the Basel minimum) of the exposure amount, while a 1,250% risk weight effectively requires full backing.

The Basel framework will be in force starting in January 2025.

Watch: Future-proof data governance with Pieter Den Dooven