MiCA presentation for B4B launch event

1. Beyond MiCA:
Banks crypto exposures:
drivers and capital framework
(BCBS crypto standard)
Françoise Guebs
AI Week – 30.03.2023

2. OUTLINE
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I. Banks adoption of crypto assets evidence
II. BCBS crypto standard
III. Articulation of BCBS crypto standard and MiCA
•
I. Banks crypto exposures: data
II. Drivers for crypto adoption
III. BCBS Crypto Standard
Disclaimer: This material represents the views of the author and does not
necessarily represent NBB views or NBB policy. Reference made to public
BCBS and FSB sources are included in Annex. No reference shall be made to
this material or oral interventions of its authors based on this material
without the express consent of the authors.

3. Title of the slide
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As of end-June 2022, a small portion of banks (17
large internationally active banks) reported crypto
asset exposures or crypto assets under custody –
11 from the Americas, 4 from Europe (3 in Europe,
UK), and 2 from the rest of the world
Banks crypto exposures (Source: BCBS, Basle III monitoring report, 02.2023):

4. Title of the slide
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Crypto (and crypto business) exposures and
activities remain small:
 As of August 2022, the total market capitalization of
cryptocurrencies stood at $1.1 trillion (S&P Global)
 Total prudential crypto asset exposures(*): circa
€2.9 bn (0.013% of total exposures of banks
reporting cryptoasset exposures; 0.003% of total
exposures of banks included in the monitoring
exercise)
 Crypto assets under custody : circa €1.0 bn
(0.005% of total exposures of banks reporting
crypto asset exposures, 0.001% of total
exposures).
 NB: Eurozone sources indicate an exposure of
below € 1 mio (direct holding), € 212 mio in custody
and € 5 mio AuM
(*) Exposures mean direct crypto asset exposures, including synthetic or derivative exposures,
that give rise to credit or market RWA
Banks crypto exposures (Source: BCBS, Basle III monitoring report, 02.2023):

5. Title of the slide
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Underlying Instrument
 The underlying assets of the reported
prudential crypto asset/business exposures
are primarily Bitcoin (43%), Coinbase (29%)
– including equity and debt, Ether (4%),
Singtel Group (3%) – tokenised bonds, and
Sembcorp Financial Services (1%)
 Almost all (99%) of exposures with
underlying exposures to Bitcoin or Ether
are due to products linked to these two
crypto assets, rather than spot exposures
Banks crypto exposures (Source: BCBS, Basle III monitoring report, 02.2023):

6. Title of the slide
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Activity
Exposures are primarily in response to growing client interest
(trading or clearing futures referencing crypto currencies)
• Clearing (41%): clearing of crypto asset derivatives
• Trading (32%): trading of crypto assets or crypto asset-linked products
• Holdings (10%): owning crypto assets or crypto asset-linked products
• Lending and SFTs (8%): lending to entities with crypto asset exposures or
against crypto asset collateral; and securities financing transactions (SFTs)
involving crypto assets
• Facilitation: facilitation of client trading (self- or manager-directed) or
other activity of crypto asset-linked products; and management of
investment portfolios
• Other (8%): provision of insurance for crypto assets; internal or intra-bank
operational use of crypto assets; and all other activity.
Banks crypto exposures (Source: BCBS, Basle III monitoring report, 02.2023):

7. Title of the slide
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Banks exposures to crypto: outlook
• Crypto issuance: increased interest in tokenised e-money and deposits (cf. JPM Coin)
• Crypto services:
• Large financial institutions have announced plans to launch institutional crypto-asset
custody/wallet, trading/RTO and execution of orders and exchange services
• Partnership with independent crypto exchanges: some banks have started to, purchased or partner
with independent crypto exchanges, a trend which is expected to increase
• Exposures to crypto and crypto derivatives / ETFs and crypto holdings
• Crypto-asset derivative markets remain relatively small but have grown rapidly
• Open interest in crypto-asset futures on regulated exchanges increases
• Open interest in bitcoin options increases
• Crypto holdings expected to increase, as well as accepting crypto assets as collateral
• NB: DLT-based solutions for clearing, payment, settlement and smart contracts are already in use
and further developments explored (e.g., JPM Onyx)

8. Title of the slide
Source: FSB, BCBS 8
Drivers of banks adoption (focus on holdings/investment)
• High volatility – valuation sensitive to news and
noise; e.g. Elon Musk Tweets
• Certainty of valuation and auditors’ approval
• Accounting status
• Shortage of regulated custody services
• Liquidity
• Robustness of market infrastructures
• Trade documentation
• Lack of qualitative disclosures
• Lack of regulatory compliant products and
platforms
• Legal & regulatory uncertainty
Barriers (1)
• Search for yield
• Portfolio
diversification (no
clear/constant
correlation with
stock markets)
Drivers (1)
Barriers could lead to
investing via funds rather
than through spot
exposures, but crypto
regulated funds remain
very limited

9. Title of the slide
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Drivers of banks’ adoption (focus on stablecoins or tokenised e-
money issuance)
• Various asset designs and lack of
consensus on soundness of design
• Regulatory uncertainty
• Blockchain novelty, skills
Barriers (1)
• DLT technology
• Programmable nature of
payments
Drivers (1)
Source: FSB, BCBS

10. Title of the slide
Source: FSB, BCBS 10
Drivers of banks’ adoption (services)
• Regulatory/supervisory uncertainty
• Blockchain novelty, skills
Barriers (1)
• Customer demand
• Trust on regulated (off-chain) intermediaries
(decentralisation illusion) in the EU & Failures
(e.g. FTX) effect, especially re. custody
Drivers (1)

11. Title of the slide
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Initiatives towards legal/regulatory certainty impacting
banking crypto engagement
BCBS crypto standard (Prudential treatment of cryptoasset exposures (December 2022)
BCBS regulatory framework addressing banks’ holdings of crypto-assets and other exposures to crypto
assets was approved on 16 December 2022.
It sets (a.o.) capital requirements, an exposure limit, risk management and disclosure obligations along
with supervisory review processes.
Current status
To be transposed into EU law by 1 January 2025.

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Initiatives towards legal/regulatory certainty impacting banking crypto
engagement
• Custody/wallet services
• Operating trading platform
• Exchange against fiat
currencies or crypto assets
• Execution of orders
• Placing
• RTO
• Advice
• Portfolio management
• Issuer stablecoins (E-money tokens, Asset-reference tokens, or other
crypto assets)
• Potential Crypto assets “bridge” role in DeFI / services:
• Investing /holding
• Lending / borrowing
• Crypto asset intermediary (offeror)
• Custody of reserve assets (custodial stablecoins)
MiCA
BCBS crypto
standard (Banks)

13. 13
Prudential treatment of cryptoasset exposures (December 2022)
BCBS crypto standard (Overview)
Source: BCBS

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Banks are required to classify crypto assets in two Groups:
BCBS crypto standard (Overview)
Group 1:
Subject to ‘classification conditions’
1a: Tokenised traditional assets
1b: Stablecoins
(*) Group 2 exposure limit:
A bank’s total exposure to Group 2 crypto assets must not
exceed 2% of the bank’s Tier 1 capital and should
generally be lower than 1%.
Group 2:
Group 1 assets failing to meet
classification conditions
Unbacked assets
Subject to Group 2 exposure limit (*) and 1250% RW
(except when meeting certain criteria)
Group 2:
Group 1 assets failing to meet
classification conditions
Unbacked assets
Subject to Capital Requirements based on the risk
weights of underlying exposures as set out in the
existing Basel Framework

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Group 1 “classification conditions:
BCBS crypto standard (Overview)
Group 1a :Tokenized traditional assets
Same level of legal rights than traditional assets (no additional
counterparty credit risk, no conversion needed into traditional assets needed to
support ownership):
• Bonds, loans, claims on banks (including in the form of deposits), equities
and derivatives
• Commodities
• Cash
Group 1b : Stablecoins
• Stabilisation mechanism that is effective at all times in linking its
value to a traditional asset or a pool of traditional assets (i.e., reference
asset(s)) :
 Redemption rights
 “Redemption risk test”: to ensure that the reserve assets are
sufficient to enable the cryptoassets to be redeemable at all times,
including during periods of extreme stress, for the amount to which
the cryptoasset is pegged
>< algorithmic stablecoins
• Issuer is supervised and regulated by a supervisor that applies
prudential capital and liquidity requirements to the issuer
General classification conditions:
 Legal enforceability of crypto asset arrangements
 Adequate risk management of network/DLT by sound entities, incl.
performance of issuance, validation, redemption and transfer of the cryptoassets by
entities following robust risk governance and risk control policies
 Entities that execute redemptions, transfers, storage or settlement finality
of the cryptoasset, or manage or invest reserve assets, must: (i) be
regulated and supervised, or subject to appropriate risk management
standards; and (ii) have in place and disclose a comprehensive governance framework.

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General requirements
BCBS crypto standard (Overview)
Operational risk management:
 Cryptoasset technology risk: including but not limited to:
• Stability of the DLT or similar technology network: reliability of the source code, governance around protocols
and integrity of the technology, capacity constraints, scalability, whether the underlying technology has been tested
and had time to mature in a market environment, type of consensus mechanism, etc.
• Validating design of the DLT, permissionless or permissioned : managing risks relating to accuracy of the
transaction records, settlement failure, security vulnerabilities, privacy/confidentiality, and the speed and cost of
transaction processing.
• Access to crypto assets, fraud risk and cyber risk
• Trustworthiness of node operators
 Legal risk, accounting classification risk
 AML/CFT risk
 Valuation and mispricing risk due to operational processes

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Issues subject to further work
BCBS crypto standard (Overview)
• Redemption risk test: composition of reserve assets
• Statistical test that can reliably identify low-risk stablecoins
• Status of permissionless blockchains under Group 1

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Annex – References
BIS
• BIS Working Papers, No 1013, Banking in the shadow of
Bitcoin? The institutional adoption of cryptocurrencies
Basel Committee on Banking Supervision
• Basel III Monitoring Report (February 2023)
• Prudential treatment of cryptoasset exposures (December 2022)
FSB
• Assessment of Risks to Financial Stability from Crypto-assets (16 February 2022)
• The Financial Stability Risks of Decentralised Finance (16 February 2023)
• Review of the FSB High-level Recommendations of the Regulation, Supervision and Oversight of “Global Stablecoin”
Arrangements: Consultative report (11 October 2022)
• Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets Consultative document (11 October 2022)