This article will explore the BIS’s role in crypto regulation, including its focus on innovation and fintech, its proposals for addressing crypto risks, and its recent endorsement of a limit on crypto reserves among banks.
The Bank for International Settlements (BIS) is a global institution that acts as a bank for central banks. In recent years, the BIS has been paying close attention to the risks and failures in the crypto market and has released bulletins outlining potential lines of action.
This article will explore the BIS’s role in crypto regulation, including its focus on innovation and fintech, its proposals for addressing crypto risks, and its recent endorsement of a limit on crypto reserves among banks.
The BIS & Cryptocurrencies
The Bank for International Settlements (BIS) is an organisation that represents many central banks and nations, which collectively account for a significant portion of the global economy. It functions as a bank for central banks, and its primary objective is to promote monetary and financial stability through international collaboration. The BIS also endeavours to offer strategic insights and solutions to major policy challenges.
The BIS has a special section on its website that is devoted to innovation and financial technology (fintech). This section provides users with access to a range of resources, including research studies, speeches, and publications, that focus on the topics of cryptocurrency and digital assets. The BIS has been paying close attention to the risks and failures in the crypto market and has released bulletins outlining potential lines of action.
The BIS Proposal for Addressing Crypto Risks
In January 2023, the BIS released a bulletin titled “Addressing the risks in crypto: laying out the options” highlighting the risks and failures that have taken place in the crypto market in recent years, such as the lack of transparency, volatility, and potential for illicit activities.
To address these risks before they become systemic, the bulletin outlines three potential lines of action: ban, contain, or regulate. The ban option is the most extreme and would involve prohibiting cryptocurrencies altogether. However, this option would be challenging to enforce and could result in useful innovation being lost or delayed.
The Contain Option could be done by limiting the flow of funds into and out of cryptocurrency and limiting other connections with traditional finance. This approach would aim to prevent cryptocurrencies from posing a significant threat to financial stability.
The third option, the regulate option, suggests that authorities take a “functional” approach by identifying the key economic functions performed by crypto activities and assessing how they would be impacted by regulation.
The BIS acknowledged that a complete ban on cryptocurrencies is unlikely to be effective, given the decentralised nature of these assets and the difficulty in enforcing such a ban. Instead, the BIS recommended a comprehensive approach to regulation that would promote financial stability and protect consumers and investors.
The online appendix to the bulletin identified the options applied in ongoing initiatives internationally and demonstrated that most jurisdictions (EU, UK and US authorities) have taken a “regulate” approach, although Chinese authorities have taken a “ban” approach.
The BIS Endorsement of a Limit on Crypto Reserves Among Banks
Based on a report titled ‘Prudential Treatment of Crypto Asset Exposures’, the Heads of Supervision of the BIS and the Group of Central Bank Governors have endorsed a limit of two percent on crypto reserves among banks. This is expected to be effective from January 1, 2025.
The report features a final standard structure for banks regarding exposure to digital assets. These include stablecoins, unbacked cryptocurrencies and tokenised traditional assets. The report also includes feedback from the stakeholders.
BIS’ announcement showed the global banking system’s relatively low direct exposure to digital assets. Along with this, it also underlined the importance of having a strong minimum framework for internationally active banks to mitigate risks.
As per cointelegraph.com, the representatives from the Bank of Spain highlighted the efforts of the Committee to mitigate emerging financial stability risks and a goal to further strengthen the regulation, supervision, and practices of banks worldwide. The Committee’s top priorities will be digitalisation, tackling emerging risks and climate-related financial risks, along with monitoring and implementing Basel III.
The Importance of a Unified Global Approach
One of the challenges in regulating cryptocurrencies is the lack of a unified global approach. While most countries have taken a regulate approach, the level of regulation and the specific requirements vary significantly. This lack of a common approach has made it difficult to ensure consistency and stability in the global crypto market.
The BIS recommended that international cooperation among regulators and standard-setters would be necessary to address the risks posed by cryptocurrencies and digital assets. This would involve developing common standards for reporting and supervision, as well as sharing information and best practices.
The BIS has also been working with other international organisations, such as the International Organization of Securities Commissions (IOSCO), to develop a common approach to regulating cryptocurrencies. This has involved sharing information on regulatory approaches and identifying areas of common concern.
Conclusion
In conclusion, the role of the Bank for International Settlements (BIS) in regulating cryptocurrencies and digital assets is crucial in ensuring financial stability and protecting consumers and investors. As a global institution that acts as a bank for central banks, the BIS has a unique perspective on the global financial system and can provide insights and responses to core policy issues.
While the crypto market continues to evolve, the BIS will play an important role in shaping the regulatory framework for these assets. The lack of a unified global approach to regulating cryptocurrencies poses a challenge, and international cooperation among regulators and standard-setters will be necessary to address the risks posed by cryptocurrencies and digital assets.
Overall, the BIS’s efforts in addressing the risks and failures in the crypto market are commendable, and its proposals for regulating cryptocurrencies provide a useful framework for policymakers and regulators.
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