BIS publishes updates on its thinking on crypto-assets and CBDCs

18 March 2019

Recently the Bank for International Settlement (“BIS”) published two new updates relating to Fintech and crypto-assets:

  1. a statement on crypto-assets and the prudential measures firms should implement from the Basel Committee on Banking Supervision (“BCBS”); and
  2. a new report on Central Bank Digital Currencies (“CBDCs”) from the Committee on Payments and Market Infrastructures and the Markets Committee (the “Committees”).

1. Statement on crypto-assets

In its statement on crypto-assets, the BCBS set out its view that the market for these types of products is small relative to the global financial system and banks currently have very limited direct exposure to the asset class.  Nonetheless, the continued growth of crypto-asset products and platforms in light of the volatility and immaturity of the asset class could pose risks to financial stability.
 
The BCBS also identifies a number of risks for banks including liquidity risk, credit risk, market risk, operational risk (including fraud and cyber risks), money laundering and terrorist financing risk and legal and reputation risks.
 
To address the risks, the BCBS sets out four minimum measures it expects banks with exposure to crypto-assets to undertake:
  • Due diligence – comprehensive due diligence should be undertaken before acquiring crypto-assets or providing crypto-asset related services;
  • Governance and risk management – a bank’s risk management system should consider the additional risks and exposures related to crypto-assets.  Its processes should be able to deal effectively with crypto-asset specific risks (e.g. increased money laundering risk).  A banks management information should include information relevant to its crypto-asset risk profile and the bank’s capital and liquidity assessment processes should incorporate exposure to crypto-assets;
  • Disclosure – any material exposures to crypto-assets or related services should be disclosed; and
  • Supervisory dialogue – a bank should inform its supervisory authority of any actual or planned crypto-asset exposure.
The BCBS and the Financial Stability Board are coordinating on their work in relation to the risk of crypto-assets and the BCBS plans to clarify the prudential treatment of exposure to crypto-assets in due course.
 

2. Central Bank Digital Currencies

Context
 
In summary, CBDCs are a type of digital currency that allow users access to central bank money, as opposed to commercial bank money. 
 
Currently consumers only have access to central bank money in the form of physical cash.  However, central banks are becoming increasingly interested in offering CBDCs to consumers.
 
This is partly due to the rise in the use of digital payment methods in society and the corresponding decline in the use of cash, but the Committees emphasise that this is only part of the picture (see below).  The report follows BIS research published on 11 March 2019, which shows that cash payments still predominate worldwide.
 
CBDCs themselves are not a new concept, but the proliferation of new technologies such as distributed ledger technology (“DLT”) in recent years is prompting exploration of new models for making CBDCs accessible to consumers.
 
Key takeaways from the CPMI's report
 
The Committees' report sets out its initial analysis on CBDCs and a high-level overview of their implications for payments, monetary policy and financial stability.  The report identifies several potential benefits of consumer-accessible CBDCs, including:
  • enhanced settlement efficiency for transactions involving securities and derivatives when combined with DLT;
  • providing a safe, robust, and convenient payment instrument as an alternative to cash;
  • allowing for digital records and traces, which could improve the application of AML and CFT rules; and
  • functioning as a safe asset comparable in nature to short maturity government bills.
However, the Committees are clear that more product design experimentation and experience is needed, and that central banks need to consider regulatory issues, such as potentially broadening assets that banks can hold as collateral in times of financial stress. 
 
The Committees also note that that the widespread consumer use of CBDCs could damage the current model of commercial banks taking customer deposits and lending to others.
The Committees note that further research into the possible effects of consumer CBDC use on interest rates, the structure of intermediation, financial stability, and financial supervision is warranted but it encourages central banks and other authorities to keep reviewing their positions.
 

3. Where next for crypto-assets and CBDCs?

The BCBS statement, whilst setting out the risks relating to crypto-assets, also sets out guidance for banks with a high risk profile who intend to invest in or provide services relating to crypto-assets.  This also highlights the belief by central banks that, whilst difficult, the risks relating to crypto-assets can be effectively managed which could provide a brighter future for the crypto-asset industry.
 
The CBDC report shows that central banks are now seriously considering the idea of making CBDCs accessible to consumers.  However, as set out by BIS, there are still a number of key concerns which will need to be addressed before any such action is likely to be taken.
 
In the UK, the Bank of England’s position is that it is not currently planning to create a CBDC.  However, as it is considering CBDCs in its research and exploring the area in its future research, the Bank is considering the potential benefits that CBDCs could bring.
 
Co-authored by Maggie Lund
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Future Dates

* Estimated date

  • 10 December 2019

    FCA CP19/29  on recovering the costs of supervising cryptoasset businesses under the Money Laundering Regulations.  For the registration fee proposal, the consultation closes on 11 November 2019. The FCA intends to publish feedback and confirm the registration fee in its December 2019 Handbook Notice.

    For the periodic fee proposal, the consultation closes on 10 December 2019. The FCA intends to publish feedback in its April 2020 annual fee-rates consultation paper.

  • 31 December 2019

    Following PRA's policy statement (PS10/17) - operational continuity firms are expected to submit the template (PRA109) 45 business days after the first reporting period ending 31 December.

  • *2020

    The date by which all references to CRA ratings in laws and regulations relating to banks are to be removed. This will be done by the Commission based on technical advice from ESMA. EIOPA will be responsible for implementation.