In a move aimed at monitoring stability and shaping policy, the Prudential Regulation Authority (PRA) has requested that businesses disclose any current or future exposure to cryptoassets by next March. This disclosure will enable the PRA to calibrate its prudential treatment of cryptoasset exposures and analyze the relative costs and benefits of different policy options.
Background on the Basel Framework
The Basel framework, introduced in December 2022 by the international banking regulator, the Basel Committee on Banking Supervision (BCBS), outlines capital and risk management requirements for banks’ exposure to cryptoassets. The framework classifies crypto assets into three broad categories based on their risk profiles:
Low-Risk Crypto Assets
- These are typically stablecoins or other tokens pegged to a fiat currency, such as the US dollar.
- They are considered low-risk because they have a fixed exchange rate and are backed by a reserve of the underlying asset.
Moderate-Risk Crypto Assets
- These include most other types of cryptocurrencies, such as Bitcoin (BTC) or Ethereum (ETH).
- They are considered moderate-risk because their value can fluctuate rapidly and is not pegged to a fiat currency.
High-Risk Crypto Assets
- These include decentralized finance (DeFi) tokens or other types of assets that are highly volatile.
- They are considered high-risk because they have a high potential for price swings and may be subject to market manipulation.
The PRA’s Request
In its December 12 statement, the PRA asked firms to share their current and expected future cryptoasset exposures and explain how they use the Basel framework for holding cryptoassets. The regulator is also seeking information on firms’ use of permissionless blockchains, which are decentralized networks that allow anyone to participate in transactions without needing permission from a central authority.
While there are benefits to using permissionless blockchains, such as increased security and transparency, they also pose risks, including:
- Lack of settlement finality
- Settlement failure
- No guaranteed link between the intended owner of the asset and the entity that may have control of the authentication and validation mechanism
The PRA notes that the use of permissionless blockchains cannot be sufficiently mitigated at present, although it has listed this classification as remaining under review.
Growth in Crypto Adoption
A growing number of firms globally are considering or taking the plunge to buy Bitcoin (BTC), hoping to catch a windfall from the cryptocurrency that hit a milestone six-figure value early this month. Recent examples include:
- Boyaa Interactive International: On November 29, the Hong Kong online card and board game company announced it had adjusted its treasury assets and swapped nearly $50 million worth of Ether (ETH) into Bitcoin.
- Metaplanet: A day earlier, on November 28, Japanese investment firm Metaplanet announced plans to raise over $62 million (9.5 billion Japanese yen) to purchase more Bitcoin for its treasury, which currently holds 1,142 Bitcoin worth over $114 million.
Monitoring Financial Stability
The PRA hopes that gathering current and intended crypto business activities can be used as a base from which to monitor the financial stability implications of these assets. The regulator is asking firms to take into account any future plans of cryptoassets up to September 30, 2029.
This request aims to inform work across the PRA and the Bank of England on cryptoassets by helping them calibrate their prudential treatment of cryptoasset exposures and analyze the relative costs and benefits of different policy options.
