Yesterday the Basel Committee on Banking Supervision published a revised consultation on the capital requirements for crypto asset risk exposures. This is an iteration of the initial proposals issued last year. While some had hoped for more relaxed rules, with one major exception, they’re stricter, as the head of the committee warned previously. All mainstream stablecoins are unlikely to pass the tests, so they will be treated as extremely high risk like other cryptocurrencies.
Apart from allowing for hedging, as before, the Basel Committee classifies crypto-assets into traditional assets using DLT, stablecoins, and cryptocurrencies. The previous article elaborates on how Basel rules work in general.
The key changes are:
- An overall limit on exposure to cryptocurrencies to 1% of tier capital
- A recognition of hedging of cryptocurrencies
- Stricter rules for stablecoins
- For traditional assets tokenized using DLT there is an infrastructure risk of 2.5%
The one area of significant accommodation is hedging. Where risk exposures to cryptocurrencies are hedged, the amounts are netted, but there is a 100% capital charge. That’s significantly better than previously, which effectively ignored hedging.
For all other cryptocurrency exposures, the risk weighting is the highest given for any risk at 1250%, making it unattractive for banks to keep them on the balance sheet.
Basel proposed stablecoin requirements
The proposed Basel rules impose tests to ensure stablecoins are redeemable and their price doesn’t deviate too much from par. Additionally, there are requirements for managing reserve assets.
Based on the pricing tests alone, our assessment is that no current large stablecoin would pass the tests. In terms of reserve assets, the stablecoin providers would need to give weekly breakdowns of the backing assets. Although surprisingly, there only needs to be an external audit annually.
To fully qualify as a lower risk stablecoin, the price cannot go below 99.9 cents on more than three days in 12 months. A stablecoin outright fails the test if it drops below 99.8 cents more than ten times during a year. We assume this is at any point during the day, but that’s unclear.
Using data from Messari, USDC, considered higher quality than Tether, would have failed both tests intraday every day during the past month. Tether managed to pass on six out of 30 days. However, at ‘close’ USDC would have failed the first test just four times compared to 16 times for Tether. But extrapolating to a year, that’s enough for both to be classed as a pure cryptocurrencies.
Blockchain data sources are notoriously inconsistent, so on what data will the pricing assessment be made? And could the pricing be gamed by a competitor posting some low price transactions?
Recognizing that most permissionless stablecoins will fail these tests, the Basel Committee asked for suggestions. It’s also considering whether to waive these rules if the stablecoin is regulated.
Tokenized traditional assets
Apart from adding a 2.5% infrastructure risk surcharge to tokenized traditional assets, they’re treated the same as conventional assets. However, the rules state they will be treated as a cryptocurrency if they “first need to be redeemed or converted into traditional assets before they receive the same legal rights as direct ownership of traditional assets.” The cryptocurrency treatment also applies if they involve any additional counterparty risks.
These traditional asset rules are likely to get tested soon, given the EU’s DLT pilot regime for securities comes into force early next year.
