GFMA and IIF rescind Basel Bank’s permissionless blockchain treatment – Ledger Insights

The Basel Committee on Banking Supervision (BCBS) last week concluded its December consultation on updated crypto asset rules. Five major industry groups responded by withdrawing the commission’s plan to treat all permissionless blockchain tokens, including tokenized securities, as high-risk cryptocurrencies (Group 2). For assets classified as Group 2, banks must set aside large amounts of capital, often $1 for every $1 of cryptocurrency.

Group 1 assets include tokenized traditional securities and eligible stablecoins.

Corresponding bodies include the Global Financial Markets Association (GFMA), the Futures Industry Association (FIA), the International Finance Institute (IIF), the International Swaps and Derivatives Association (ISDA), and the Financial Services Forum.

permissionless blockchain

“We note BCBS’s conclusion that the use of permissionless blockchains poses a number of unique risks, some of which cannot be adequately mitigated at this time. We respectfully disagree with that conclusion,” the response read. It has been stated.

“In principle, the use of public permissionless blockchains to develop tokenized assets should be allowed to improve efficiency, where risks can be managed.”

Therefore, they argue, banks can manage risk. Smart contracts may include functionality to seize, freeze, or burn tokens. Additionally, the token terms and conditions may give the tokenization agent the right to remove the token from the ledger and issue the token in a traditional manner.

They provided an analogy between permissionless blockchain and the internet. On the Internet, the underlying network is permissionless, but applications on top of it are often gated or require permission.

“The exclusion of permissionless public networks could impact the broader development of the liquidity tokenization market, especially due to the potential lack of interoperability between private blockchains,” the association said.

They further argued that it was important not to discourage bank participation, as this would encourage non-bank financial institutions and shadow banking activities. This increases systemic risk.

These associations believe that the Basel treatment of permissionless blockchains violates the principles of technology neutrality and “same assets, same risks.”

Infrastructure risk add-on

The Basel Committee’s initial proposals planned for a 2.5% infrastructure risk add-on to be applied to tokenized traditional assets. However, Basel removed this in its final cryptocurrency rules. The proposed changes in December suggested reintroduction, but the level was 0%. Local regulators will have the option of increasing this number.

The industry group wants all references to infrastructure risk add-ons removed.

If that fails, they are proposing to adopt the Hong Kong Monetary Authority (HKMA) proposal as an alternative. The risk add-on is also set to 0%. The association is proposing individualized treatment rather than imposing a uniform rate across the industry. In other words, authorities will only impose add-ons if they identify specific risks in a bank’s internal infrastructure.

Payment finality

A proposal from Basel last December clarified that settlement finality should apply to both the secondary market and asset issuance. However, the association urges that this regulation not be strictly enforced.

Instead, they point to the evolving legal landscape on this issue. Examples include changes to the Uniform Commercial Code (UCC) in the United States and the review of the Law Commission in the United Kingdom.

Instead, they suggest that banks need to ensure they know how and when a transaction reaches finality. In addition, the bank must conduct a legal investigation. They argue that the foreign exchange market takes a similar approach.

As a side note, the association points out that DLT helps reduce payment risks.

stablecoin problem

The industry response covers several issues regarding stablecoins. First, they are concerned about some changes that would prevent banks’ stablecoin reserve managers from offering bank accounts of any kind. That’s because it insists on keeping all reserves out of bankruptcy. The association requests that cash assets be excluded from this requirement.

They still have reserves and are seeking permission to use reverse repurchase agreements. Most major stablecoin issuers use them.

Next, they are asking to be able to use stablecoins as collateral.

Overall, they point out that Basel’s stablecoin requirements are more onerous than current laws and frameworks issued by the UK, EU, Singapore, Dubai, and Hong Kong.

“The BCBS amendments should not have the effect of preventing banks from exercising their rights already provided for in existing regulatory and legal frameworks,” they wrote.

Furthermore, it points out the contradiction that banks with e-money licenses are subject to much more stringent requirements for tokenized e-money.

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