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Beyond Basel IV: Crypto-assets and the Basel framework

Beyond Basel IV: Crypto-assets and the Basel framework

The incorporation of crypto-assets into the Basel framework has already begun – here’s what you need to know.

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Craig Davis

Partner, Advisory, Risk Consulting

KPMG in Canada

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This article was co-authored by David Alexander, Manager, Financial Risk Management, KPMG in Canada

Although the implementation of the final Basel III reforms ('Basel IV') remain in focus for regulators and deposit-taking institutions (DTIs), the Basel Committee for Banking Supervision (BCBS) is already considering how the Basel framework should incorporate crypto-assets. In March 2019, the BCBS issued a newsletter which outlines its minimum supervisory expectations for banks that acquire crypto-assets and/or provide related services. It subsequently published a discussion paper on designing a prudential treatment for "high-risk" crypto-assets in December 2019.

Summary of BCBS expectations and prudential treatment for crypto-assets

The BCBS' March 2019 statement on crypto-assets articulates its minimum expectations for banks' exposures to crypto-assets and related services. These expectations apply to all jurisdictions that do not prohibit such exposures and services, and may be further augmented by additional country-specific requirements. A subsequent discussion paper published in December 2019 proposes a prudential treatment for high-risk crypto-assets. Specifically, the paper identifies the financial and non-financial risks originating from crypto-asset exposures.

To date, OSFI has not issued any specific guidance that addresses the permissibility of crypto-asset ownership and activities. However, Canadian DTIs are already exploring the possibility of offering crypto-asset related services to their customers.

Consultation on the prudential treatment of crypto-assets is still underway, however the BCBS appears to be leaning towards a conservative approach. The BCBS' minimum expectations with respect to due diligence, risk management and governance, disclosure, and supervisory dialogue have already been established, and can be used as a starting point for designing an internal control framework. Canadian DTIs should keep in mind that Basel's minimum expectations may be augmented by additional, expectations from OSFI, which take into account specific characteristics of the Canadian marketplace. Our publication, Beyond Basel IV: Incorporating Crypto-Assets into the Basel Framework, explores these topics in further detail

How KPMG can help

DTIs that are exploring the possibility of offering crypto-asset related services should consider the impact of the Basel Committee's minimum expectations and proposed prudential treatment of crypto-assets. Once these regulations are finalized, local regulators including OSFI will implement these rules domestically, and DTIs will have to accommodate these new standards into their overall risk management framework.

KPMG will continue to track the evolution of prudential standards for crypto-assets from their finalization BCBS level to their incorporation into domestic rules. We're pleased to discuss how these new regulations will impact your organization.

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