Basel Committee Warns Crypto Growth could Threaten Financial Stability

Basel Committee on Banking Supervision (BCBS), an international authority on banking, has taken the note of ongoing development in the field of the financial sector. The committee has sounded an alert to the traditional banking sector about the possible disruption coming from the field of cryptocurrency and blockchain technology. Just so you know, the Bank for International Settlements (BIS) is behind the BCBS. BIS is based in Switzerland and in fact, has got the support of sixty central banks in the world. Any direction or recommendation coming from the BCBS has important implication for the policymakers, and this latest warning is also expected to have its ramifications in the financial sector.

BCBS Concerns

In its alert, BCBS expressed the concerns that exponential growth in the crypto industry could pose serious questions for the financial stability of the world which, in turn, is going to have an impact on financial risks for banks. The committee is of the view that despite the small size of the crypto segment today, the challenge arising from the digital assets cannot be ignored. The global financial system is comparatively very large to the crypto industry still; there is a need to address the issue of financial risk associated with the cryptocurrencies.

Making a case against the crypto assets, the committee emphasized that it is not safe to rely on the digital currency as a medium of transaction or exchange. The committee further said that neither it is reliable for the people to store their money in the form of digital currencies. Calling the digital assets misnomer, BCBS also questions the crypto industry in terms of their legal validity and stressed on the fact that digital assets are not backed by any government authority in the world.

BCBS associated the digital assets with a number of illicit uses which could manifest in the form of money laundering, terrorist financing activities, and supplementing illegal transfer of drugs. There is also a huge risk related to hacking and online theft in case of cryptocurrencies which need to be taken into consideration while adopting them. In order to allay the fears of the investors, BCBS has given a number of requirements that banks should follow while providing services related to digital currencies.

BCBS Recommendations

According to BCBS recommendations, any bank which wants to provide cryptocurrency related services needs to ensure that it has sufficient technical expertise to assess the risk associated with dealing in digital currencies correctly. The financial institution must have a proper technical framework in place and should guarantee the investors about the risk management policies it has adopted including its data safety and management system. A proper risk analysis of the crypto assets of the bank needs to be undertaken before venturing out in the field of digital assets. Besides these recommendations, BCBS also recommended that banks should publicly disclose all the information related to their crypto services, just like they do it for other services related to their operations and procedures. This will help the financial institutions to comply with the rules and regulations of the local authorities and also help them to improve on the public risk management factor.

Earlier in January this year, BIS carried out a research and published the findings that the problems related to Bitcoin, the biggest cryptocurrency by market capitalization is not going to fade away even if the digital coin shift from its proof of work mechanism. BIS also stated that around 70% of the total central banks around the globe are looking to reap the benefits of digital currency issued by the central banks. However, it pointed out that the level of motivation and enthusiasm towards the use of cryptocurrencies issued by central banks different in different contexts.

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