By George Ward
Some banks worldwide have lowered their exposure to certain crypto assets by 43.6% over the last 12 months, according to the Bank for International Settlements (BIS). Overall, there has been a broad reduction in direct exposure to cryptocurrency and via derivatives between 2021 and 2022.
A Drop In Institutional Crypto Exposure
Accordingly, the total exposure to digital assets, both direct crypto and via derivative, is reportedly down from about 62% in 2021 to nearly 15.5% in 2022, as shown by the BIS Basel Committee on Banking Supervision (BCBS) report on Tuesday.
Furthermore, the continuous change in banks’ crypto exposure resulted from the response to the BIS survey that fewer banks have completed. In addition, the drop is also attributed to market conditions and banks limiting their exposure to crypto in response to the BCBS global crypto guidelines, according to the report.
The sample showing banks’ involvement in the recent survey dropped to 126 banks out of the initial 182. Apart from the broader crypto market bloodbath, bankruptcies leading to the collapse of several crypto firms like Celsius and FTX led to the loss of millions of dollars worth of investments out of the industry last year.
In addition, the increased regulatory scrutiny of the digital asset space also contributed to the market contraction, which has impacted growth activities in the industry. As the global banks’ regulatory body, the BCBS has set a limit to banks’ crypto exposure to a maximum of 2%.
Assessing BCBS 2025 Global Crypto Rule
Last December, BCBS revealed that the implementation date for its global crypto rule is January 1, 2025. In a follow-up document released by the committee, the global bank regulator wants to maintain the 2% bank crypto exposure rate with its upcoming guidelines scheduled to go live in 2025.
However, about eight lobby groups have written the BCBS to review this cap on banks’ crypto asset holdings. They argue it would be too restrictive on banks and negatively impact distributed ledger technology (DLT) innovations.
January 1, 2025, agreement by the Group of Central Bank Governors and Heads of Supervision (GHOS) signals an important milestone in developing a global regulatory foundation for reducing risks of banks’ exposure to cryptocurrency. Tiff Macklem, the chairman of the GHOS, noted that the committee has set out conditions for the classifications of crypto assets, which must pass the redemptive risk and basis risk tests.
Both tests, as Macklem revealed, ensure that digital assets have sufficient reserves and that holders of a particular token can sell them for an amount close to the pegged value. Since the start of the year, regulators have taken a cautious approach in dealing with the crypto sector due to high volatility in recent months.