Banks looking to venture into the cryptocurrency market can now do so with the help of a set of guidelines provided by the Basel Committee. The committee works under the Bank for International Settlements, a collaboration between the central bank governors of ten countries hoping to help supervise banking activities.
Banks are tasked with improving risk management
The Basel Committee rolled out the guidelines that traditional banks would follow if they are to venture into the cryptocurrency market. While discussing the potential threats posed by digital assets such as their volatility and the propensity for defrauding investors, the committee pointed out that it expects banks to adopt a prudent approach when dealing with them.
The committee added that banks must improve their risk management processes in order to reduce the risk associated with crypto assets. The primary aim of the guidelines is to help banks understand the risks and the critical supervisory issues involved with cryptocurrencies and how they can improve already existing services.
In its official announcement on March 13, the banking supervisory body encouraged banks and other traditional financial institutions to carry out adequate measures and to adopt a well-defined risk management process that would help them fight fraud, terrorism financing, and money laundering problems that are often associated with the evolving cryptocurrency market. The committee encouraged banks to report risks related to crypto, both direct threats and indirect ones. They stated that “A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.” Doing so is intended to bring better financial auditing and controls to crypto trades and investments.
In their official statement, the Basel Committee noted that “Before acquiring exposure to crypto assets or providing related services, a bank should conduct comprehensive analyses of the risks involved. A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.”
Crypto assets still pose a threat to financial stability
At the moment, the exposure of banks to cryptocurrencies is relatively low, even though some of them operate bank accounts for crypto and blockchain-based businesses. Some banks offer other services, including buying and selling crypto assets, to their institutional investors.
However, some traditional banks have chosen to take a hard stance on cryptocurrencies, with some in Brazil shutting down the accounts of digital currency exchanges without formal explanation or notice.
The Basel Committee maintained that crypto assets pose a significant threat to banks and their goal of achieving financial stability, despite the continued growth experienced by the cryptocurrency sector. The report opined that cryptos are not reliable substitutes for fiat currencies and are unsafe to count on as a means of exchange or as a store of value. “Crypto assets are also highly volatile and expose banks to risks. including fraud and terrorist financing links,” the committee added.
Explaining further, the report stated that cryptocurrencies are not yet legal tender and are not supported by any government or public body. However, the committee revealed that it is currently working with other regulatory agencies as well as the Financial Stability Board to properly analyze how to treat crypto-related risks and assets.
The primary reasons why banks and other traditional financial firms are yet to venture into the crypto market is due to the high risks involved, and the extreme volatility of cryptocurrencies. Despite the criticism, some banks have started warming up to cryptos, however, with JPMorgan Chase recently launching its JPM Coin.
If the risks associated with cryptocurrencies can be reduced or eliminated, then traditional financial institutions would feel more comfortable adopting them or even developing their own. With regulatory bodies all over the world working towards eliminating the bad elements in the field, cryptocurrency adoption could grow massively over the next few years.