{"id":812526,"date":"2024-12-17T21:15:01","date_gmt":"2024-12-18T03:15:01","guid":{"rendered":"https:\/\/newsycanuse.com\/index.php\/2024\/12\/17\/uk-banking-regulator-asks-firms-to-tell-digital-asset-exposure\/"},"modified":"2024-12-17T21:15:01","modified_gmt":"2024-12-18T03:15:01","slug":"uk-banking-regulator-asks-firms-to-tell-digital-asset-exposure","status":"publish","type":"post","link":"https:\/\/newsycanuse.com\/index.php\/2024\/12\/17\/uk-banking-regulator-asks-firms-to-tell-digital-asset-exposure\/","title":{"rendered":"UK banking regulator asks firms to tell digital asset exposure"},"content":{"rendered":"
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  7. UK banking regulator asks firms to tell digital asset exposure<\/li>\n<\/ol>\n<\/div>\n

    The United Kingdom Prudential Regulation Authority\u00a0(PRA), responsible for regulating and supervising the country\u2019s banking sector, has requested that businesses disclose any exposure to digital assets by March 2025 to inform its work and help shape policy.\u00a0<\/p>\n

    In a\u00a0statement<\/a>, the PRA announced it was \u201cseeking to gather information of firms\u2019 current and expected future cryptoassets exposures,\u201d as well as how they apply the\u00a0Basel framework<\/a> for the prudential treatment of digital assets.<\/p>\n

    \u201cThis will inform work across the PRA and the Bank of England on cryptoassets by helping us calibrate our prudential treatment of cryptoasset exposures, analyze the relative costs and benefits of different policy options and providing an updated view of firms\u2019 current and intended cryptoasset-related business activities as a base from which to monitor the financial stability implications of these assets,\u201d the PRA said.<\/p>\n

    The regulator requested firms to take into account any future plans of digital asset exposure<\/a> up to September 30, 2029.\u00a0<\/p>\n

    To help with this reporting, the PRA provided a questionnaire<\/a> for firms detailing several key areas it wants businesses to address, including how they are using\u00a0permissionless blockchains<\/a>, of which the form noted:<\/p>\n

    \u201cWhile there are benefits that these new types of ledgers can bring, they also pose risks such as lack of settlement finality, settlement failure, and no guaranteed link between the intended owner of the asset and the entity that may have control of the authentication, validation mechanism.\u201d<\/p>\n

    For this reason, the PRA emphasized that the use of permissionless blockchains<\/a> \u201ccannot be sufficiently mitigated at present\u201d and listed this classification as remaining under review.\u00a0<\/p>\n

    In addition to current and future exposure to digital assets, the PRA also requested information on how firms were using the Basel framework, which was introduced<\/a> in December 2022 by the Basel Committee on Banking Supervision (BCBS)\u2014a global standard-setting authority for the prudential regulation of banks\u2014and outlines capital and\u00a0risk management requirements for banks\u2019\u00a0exposure to digital assets.<\/p>\n

    Basel framework<\/strong><\/p>\n

    The \u2018Basel framework for the prudential treatment of cryptoassets\u2019 establishes guidelines<\/a> for banks\u2019 exposure to \u201ccryptoassets,\u201d which it classifies into two groups: Group one includes stablecoins<\/a> and tokenized assets<\/a>, while Group 2 encompasses assets such as unbacked tokens and digital currencies.<\/p>\n

    Each group is subject to specific capital and liquidity requirements; for example, Group one assets must meet standard Basel requirements, including stringent risk management and transparency criteria, with potential add-ons for infrastructure risks. Group 2 assets, deemed riskier, face higher capital charges, including a 1250% risk weight for unbacked digital assets, ensuring stringent safeguards.<\/p>\n

    \u2018Risk weight\u2019 refers to a percentage value assigned to an asset to reflect its risk level relative to default or loss. It determines the amount of capital banks must hold as a buffer for specific exposures. A 100% risk weight means a bank must hold capital at least equal to 8% (the Basel minimum) of the exposure amount, while a 1,250% risk weight effectively requires full backing.<\/p>\n

    The Basel framework will be in force starting in January 2025.<\/p>\n

    Watch: Future-proof data governance with Pieter Den Dooven<\/p>\n