The Basel Committee on Banking Supervision has made some claims about cryptocurrencies and their relationship towards many of the world’s banking institutions. According to the group of international banking authorities, the growth of digital currencies has the possibility to threaten banks and even bring a problem to global financial stability.
Cryptocurrencies and Their Risks
The committee, which is basically part of the Bank for International Settlement (BIS), released a statement on Wednesday. According to its statement, there are potential risks for banks, and these include the likes of credit and market risk, liquidity, operational risk, terrorist funding risk, money laundering, and legal and reputational risk, among many others.
It is worth noting that the BIS is seen to be the central bank of all central banks. The committee, on the other hand, added that apart from the aforementioned risks, the popularity of digital currency could bring fraud and cyber issues to banking institutions.
It holds true that banks these days have direct exposure, albeit “very limited,” to cryptos. However, institutions must still be “at a minimum” when it comes to carrying out extensive due diligence. More importantly, it must understand the importance of disclosing any exposure to digital currencies in order to minimize the risks, the Basel Committee on Banking Supervision advised.
The committee added that it is essential for banks to practice risk management that is not only clear but also robust. And with that said, it is about time they start enhancing their current framework aimed at digital assets. By doing so, the committee said it would help in dealing with “high degree” of risk usually associated with digital currencies.
Mitigating Risks of Cryptos
It also added that the framework, which is aimed at promoting risk management, must be “fully integrated” to the overall risks management systems of banks. This should reportedly include the ones that are directly related to AML or anti-money laundering, evasion of sanctions, and the battle against the financing of terrorism.
The committee further advised the process of implementing a “comprehensive” assessment of all the risks and that it should be incorporated directly to banks’ internal capita, including the processes involving liquidity adequacy assessment.
Moreover, supervisory bodies must be informed of the actual or planned digital currency exposure while having the assurance that the institution has been fully assessed and, more importantly, mitigated the possible risks.
Finally, the committee revealed that it has partnered with other intenrational standard-setting organizations. The FSB or Financial Stability Board, on the other hand, is expected to arrive at guidance focused on banks’ “prudential treatment.”