On December 14, the Basel Committee on Banking Supervision, part of the Bank for International Settlements (BIS), released a consultative document proposing adjustments to its standards regarding banks’ dealings with crypto assets. This publication is a culmination of the committee’s review efforts throughout 2023, building upon the initial prudential standards for banks’ stablecoin exposure set in December 2022.
The proposed modifications mainly concern the reserve asset composition for stablecoins, particularly those classified as Group 1b in the prudential standards. These assets are subject to capital requirements based on the risk weights of their underlying exposures.
A key focus of the committee’s proposal is to mitigate redemption risks during periods of extreme market stress, where stablecoin issuers might face a surge in withdrawal claims, potentially leading to a forced liquidation of assets. To address this, the committee suggests limiting stablecoin exposures to assets with longer-term maturities by setting a maximum maturity limit for individual reserve assets. If longer-term assets are included in reserves, the committee advises that these should provide overcollateralization to cover stablecoin holders’ claims. This extra collateral is intended to compensate for potential value decreases, ensuring that the stablecoin can maintain its pegged value even in turbulent market conditions.
The document also outlines criteria for credit quality, proposing a list of high-credit-quality reserve assets suitable for stablecoin issuers. This list includes central bank reserves, marketable securities backed by sovereigns and central banks with high credit ratings, and deposits at banks of similar credit quality.
Feedback on these proposed changes is open until March 28, 2024. Regardless of whether these amendments are adopted, the prudential standards for stablecoin exposures are slated for implementation on January 1, 2025.
The Basel Committee, comprising central banks and financial authorities from 28 jurisdictions, serves as a platform for regulatory cooperation on banking supervision matters. This committee had previously issued a consultation paper in October 2023 on prudential standards for stablecoin exposure. That paper suggested requiring banks to report quantitative data on their crypto asset exposures, along with the necessary capital and liquidity requirements.
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