The Hong Kong Monetary Authority (HKMA) publishes policy statement around prudential treatment of crypto asset exposures
The Basel Committee on Banking Supervision (“BCBS”) issued on 16th December 22 its final standard on the Prudential treatment of crypto asset exposures, following two rounds of public consultation.
The standard has been developed to provide a global baseline framework for banks’ crypto asset exposures that promotes responsible innovation while preserving financial stability. To determine the prudential classifications, crypto assets will be categorised into two broad groups:
/ Group 1 crypto assets consist of qualifying tokenised assets and stable coins. They will generally be subject to the risk-based capital requirements of the existing Basel capital framework.
/ Group 2 crypto assets are crypto assets that fail to meet all of the Group 1 classification conditions. These crypto assets will be subject to a more conservative capital treatment. A limited degree of hedging can be recognised for certain types of Group 2 crypto assets.
Additional key features of the standard include:
/ Infrastructure risk add-on to cover infrastructure risk for all Group 1 crypto assets that member jurisdictions can activate based on any observed weaknesses in the infrastructure on which crypto assets are based
/ Redemption risk test and a supervision/regulation requirement to ensure that only stable coins issued by supervised and regulated entities that have robust redemption rights and proper governance are eligible for a Group 1 qualification
/ Group 2 exposure limit to serve as an additional guardrail against Group 2 exposures growing too large in a bank’s portfolio
/ Other elements to (i) prescribe the supervisory review process and disclosure requirements as well as (ii) specify how the operational risk, liquidity, leverage ratio and large exposures requirements have to be applied in the context of banks’ crypto asset exposures
HKMA wants the reporting banks to be aware that some areas, such as permissionless blockchains and additional statistical tests to identify low risk stable coins, will remain subject to monitoring and further review by the BCBS.
The final standard is scheduled to be implemented by member jurisdictions by 1 January 2025, and HKMA mentioned its intention to implement it locally in accordance with the BCBS timetable. The industry will be consulted on the specific local implementation proposal in due course. In the meantime, authorized institutions with plans to conduct crypto asset-related business activities were recommended to familiarise themselves with the new standard and consider its implications.
Head of Regulatory Product Management – APAC