Central banks published a new crypto standard for banks which have until 2025 to implement it

The Group of Central Bank Governors and Head of Supervision (GHOS) of the BIS (Bank for International Settlements) has recently decided to approve and support a new global standard for banks operating under central banks. The standard is related to the banks’ exposure to digital currencies and other blockchain products, and the Group has decided that all banks affected by the new rules have two years to comply, with the deadline being January 1st, 2025.

According to the BIS statement published this Friday, December 16th, the standard was designed by the BIS’ primary global standard setter, the Basel Committee on Banking Supervision. The standard setter has been in charge of developing the prudential regulation of banks, and this time, it was tasked with coming up with rules for the unbacked cryptoassets and stablecoins.

Banks need to be protected from the risks of the crypto industry

The statement says that the mentioned cryptocurrency asset types will be subject to conservative prudential treatment. The standard will offer a robust and prudent regulatory framework meant for banks around the world. Internationally active banks have been seeing increased exposure to crypto assets, and they must now implement responsible innovation with the goal of preserving financial stability.

For now, the direct exposure that the global banking system has had to digital currencies can still be considered relatively low. But, the BIS said that there is reason to believe that some of the recent events have led to the necessity to have a strong global minimum prudential framework for internationally active banks. The idea is to mitigate risks that might be coming from the crypto industry and which might affect the banks and through them, the global economy.

The Basel Committee was tasked with continuously assessing the bank-related developments in the digital asset markets, including the role of banks as the issuers of stablecoins, crypto custodians, and potential channels of interconnections.

What does the standard require of banks?

GHOS’ Chair, and the Bank of Canada’s Governor, Tiff Macklem, commented on the new development stating that this marks a very important milestone in developing a baseline for the global regulations for mitigating risks that crypto assets might pose to the banking system. With the increased developments that banks have seen in the crypto asset markets, it is important to continue to monitor their involvement, role, and the development of risks. He added that the GHOS would be ready to act further if that turns out to be necessary.

With the new standard, banks will have to classify digital currency assets into Group 1 or Group 2. Group 1 will represent cryptos such as stablecoins and tokenized versions of traditional assets. Meanwhile, Group 2 will consist of assets that come with higher and/or additional risks compared to Group 1. This primarily refers to unbacked cryptocurrencies.

The standard forbids banks from having exposure to Group 2 assets higher than 2% of the bank’s Tier 1 capital. Ideally, it should be below 1% at all times. In addition, the standard also recommends a redemption risk test, as well as supervision and regulation requirements for digital assets.