The Basel Committee has issued a fresh warning to the banks against the risks associated with digital assets.
Compared to the mainstream financial sector, the size of the digital asset industry is small, and banks all over the globe also have a “very limited direct exposures” to the cryptocurrency sector. The committee, however, outlined that “the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.”
Established by the central bank governors of ten countries in 1974, the Basel Committee is responsible for setting the global standard for the prudential regulation of banks. The group currently has dozens of members from various jurisdictions around the world.
In the release, the group also stressed that cryptocurrencies are not legal tenders and are not backed by any government. It also declared that these decade-old asset class “do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value.”
Proceed with Caution
The Switzerland-based committee, however, acknowledged the fact that many of the jurisdictions do not prohibit banks from offering services to the crypto-based businesses. The group warned such banks against the involvement with crypto assets mention a wide spectrum of risks including “liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering and terrorist financing risk; and legal and reputation risks.”
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The Basel Committee also branded cryptocurrencies as an “immature asset class” with a high degree of volatility as the sector is constantly evolving without any standardization.
The group urged the banks willing to get involved with the nascent industry to have “relevant and requisite technical expertise” and follow a robust risk management framework.
“Given the risk associated with such exposures and services, banks are expected to implement risk management processes that are consistent with the high degree of risk of crypto-assets,” the Basel Committee noted.
“Its relevant senior management functions are expected to be involved in overseeing the risk assessment framework. Board and senior management should be provided with timely and relevant information related to the bank’s crypto-asset risk profile.”
Work with the Regulators
In addition, the committee also recommended the banks to share information about their involvement in crypto assets with the supervisory bodies to mitigate risks.
This is not the first warning issued by the committee as, last year, it criticized the digital assets for their lack of scalability. Its head of research even compared cryptocurrencies with baseball cards and Tamagotchis for their cult-like popularity.