Washington, D.C., 21 September 2021—GFMA, along with five other trade associations, filed a comment letter expressing their belief that the Basel Committee on Banking Supervision’s consultative document on the prudential treatment of cryptoasset exposures should be revised to help realize the benefits that distributed ledger technology (DLT) can deliver across the real economy, to facilitate regulated bank involvement in cryptoasset markets and to provide an appropriately regulated and level playing field across the globe through use of the existing prudential framework. The benefits will be realized most widely and transparently when regulated banks, with a long history of existing customer relationships and experience with regulatory compliance standards relative to newer entities are able to play a meaningful role.
Kenneth E. Bentsen, Jr., CEO of GFMA and president and CEO of SIFMA, said:
“The Consultation would effectively preclude banks from being involved in the crypto assets sector, by making it economically prohibitive to do so. We believe DLT and blockchain can drive efficiencies and help customers, and we see value in delivering those benefits through banks, where there will be transparency, rather than pushing that activity to the unregulated sector. There is a need for regulation in this space, and an equal need for it to be more balanced than what has been proposed. We believe the Consultation should be adjusted, and the existing risk framework employed, to allow that to happen.”
The groups support the following principles underpinning the Consultation, while also recommending the Basel Committee adjust its approach in order to be more fully consistent with those principles:
- We agree with the Basel Committee that the approach should follow the principle of “same risk, same activity, same treatment” and that the prudential framework should be technology neutral. However, adjustments are needed to achieve true technological neutrality.
- The framework should be as simple as possible; however, there are some aspects of the proposal that should be further simplified, while other aspects should be made more risk sensitive.
- Given the cross-border nature of the cryptoasset markets, the Associations support having minimum global standards, supported by coordination across jurisdictions to help ensure an approach that is consistent and comparable.
Making it practical to bring these activities within the banking sector will have benefits for the regulatory community more broadly, for example, by providing a clear line of sight into these activities by leveraging banks’ current due diligence and reporting capabilities. Banks would also be able to offer cryptoasset-related products and services more widely and in a safe and sound manner, leveraging their existing relationships with, and knowledge of, customers and clients. Banks have a long track record of integrating new and emerging technologies in their product offerings, increasing accessibility to customers and providing robust customer protections.
Banks also would benefit from a prudential framework that is risk-sensitive and appropriately calibrated as it would provide appropriate incentives for innovation and meeting customer demand. To achieve this result, the Basel Committee should recognize hedging in the prudential framework; otherwise, underlying exposures would be significantly overstated, which runs contrary to a risk-sensitive approach.
GFMA also cautions that, if the prudential framework for cryptoassets is too punitive for bank involvement in this market, competition may be stifled. The prudential framework for cryptoassets should be appropriately calibrated to facilitate robust bank involvement in a manner that is nevertheless consistent with the Basel Committee’s overarching policy objectives.
GFMA and the other associations note the framework for cryptoassets should utilize the existing prudential framework for all other bank exposures that has been developed over many years taking into account the following criteria.
- This framework would allow for technological neutrality and be designed to reflect underlying risk.
- Along similar lines, the availability and use of effective hedging should be recognized in any prudential framework. Effective hedging reduces risks and costs, and empirical analysis shows that the ability to hedge is central to reducing volatility within a given asset class. Currently, a key concern of regulators as it relates to bank involvement in cryptoassets is the volatility of the underlying assets; however, these hedges are key to mitigating the risk of volatility in these assets for banks. In addition, banks are best positioned to both risk-manage and reduce the overall volatility of this market. If these benefits are not recognized, the activity may not be economically viable, with end users ultimately bearing the costs.
- The need for differences in the capital treatment of cryptoassets held in the banking book versus the trading book should be recognized in the framework as it is for other bank exposures, so that the different risks of trading and banking book activities are appropriately capitalized. That said, for certain Group 2 cryptoassets, the exposure to changes in price is best captured through the market risk framework. Thus, for banking book exposures to this set of cryptoassets, applying the market risk framework would be appropriate, similar to the treatment of foreign exchange (“FX”) and commodities risk in the banking book under the current framework and net short credit and equity risk in the banking book in the future.
- The capital treatment of Group 2 cryptoassets should be tied to the risks of the assets, not their accounting treatment. This approach should help avoid disparate treatment across jurisdictions resulting from different accounting regimes. Assets with different risk profiles should be subject to correspondingly different capital standards.
- The Basel Committee should work within the existing framework to develop standards that are agile by design – the framework should be able to be updated promptly when necessary to keep pace with developments.
GFMA developed its comments with the Financial Services Forum, the Futures Industry Association, the Institute of International Finance, the Internationals Swaps and Derivatives Association, and the Chamber of Digital Commerce. This broad group encompasses many sectors across the industry, offering a comprehensive, global response grounded on a broad scope of expertise to the Consultation.
Allison Parent, Executive Director of GFMA, said: “The prudential treatment of cryptoassets should leverage existing regulatory framework and the GFMA encourages ongoing public and private sector engagement as the crypto markets evolve to avoid market fragmentation and the concentration of risk in unregulated sectors of financial services. Our members are in the business of managing risk. New technologies have come before and will come again, but a new risk framework is not required for each one. The risks of crypto assets, like other existing assets, can be evaluated and managed by using the existing risk management framework, where they would be classified based on criteria and given an appropriate risk weighting–with conservative treatment applied to risky assets. We would further note that the public and the regulatory community would benefit from bank involvement in the cryptoasset space because of this long history of identifying, monitoring and managing risks from both a prudential and conduct perspective on an ongoing basis.”
SIFMA also filed a comment letter responding to the Consultation. SIFMA’s response echoes the points laid out in the GFMA letter, and emphasizes the importance of U.S. prudential and market regulators working collaboratively to develop a comprehensive regulatory approach to the treatment of cryptoassets.
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GFMA represents the common interests of the world’s leading financial and capital market participants to provide a collective voice on matters that support global capital markets. It also advocates on policies to address risks that have no borders, regional market developments that impact global capital markets, and policies that promote efficient cross-border capital flows to end users. GFMA efficiently connects savers and borrowers, thereby benefiting broader global economic growth. The Association for Financial Markets in Europe (AFME) located in London, Brussels, and Frankfurt; the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong; and the Securities Industry and Financial Markets Association (SIFMA) in New York and Washington are, respectively, the European, Asian, and North American members of GFMA.
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