WFE Position on the Targeted Review of the Committee's Prudential Standard for Banks' Cryptoasset Exposures

WFE Position on the Targeted Review of the Committee's Prudential Standard for Banks' Cryptoasset Exposures 

 

Basel Committee on Banking Supervision
Bank for International Settlements
CH-4002 Basel
Switzerland 

 

Dear Members of the Basel Committee on Banking Supervision, 

I am writing on behalf of the World Federation of Exchanges (WFE) to address the Committee’s expedited review of the prudential standard for banks' cryptoasset exposures.  

We represent the owners and operators of market infrastructures worldwide, we are keenly aware of the evolving landscape of tokenisation and the potential for new efficiencies and liquidity it may offer. In our view, tokenisation is a natural evolution of capital markets which have advanced from paper certificates, to electronic ones and, potentially now to tokens. Unlike some, we do not see tokenisation as a panacea to solve all problems but as a modernisation of existing products. 

In our view, the current BCBS standards risk preventing the growth of tokenisation in regulated markets. They do not adequately reflect the principle of technology neutrality or the concept of “same risk, same regulation.” We support these principles and have several recommendations for the Committee to consider as it re-examines these standards. 

Recommendation 1: Technology Neutrality and Same Risk, Same Regulation 

The Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and the BCBS itself have all endorsed the two principles of technology neutrality and same risk, same regulation. These principles mean that DLT-based assets which functionally perform the same roles as others should not be treated any differently than their non-DLT counterparts. 

The WFE has consistently maintained that whatever form a “traditional” asset takes – whether paper-based, electronic or token based – the underlying risks do not change. In other words, a tokenised representation of a traditional asset should be treated with the same regulatory considerations as the traditional form of that asset.  

The current Basel standards may not fully align with these principles, as they can result in situations where a tokenised version of an asset is treated less favourably than another version of the same asset when it exists on a public blockchain.  

Recommendation 2: Defining the Problem 

The BCBS definition of crypto-assets is not sufficiently risk-sensitive and does not accurately reflect the existing market conditions. This is an issue that other international standard-setting bodies have also yet to address comprehensively. As a result, the absence of a clear and consistent definition or taxonomy continues to present challenges for policymakers, contributing to ambiguity across regulatory frameworks. The Basel Committee should revisit and clarify its definition of crypto-assets. Ideally, this effort would be undertaken in coordination with IOSCO and the FSB to foster mutual understanding across financial markets and regulators.  The CFTC’s Global Markets Advisory Committee recommendations are a good indication of how a taxonomy could be used.¹ 

Recommendation 3: A Risk-Oriented Approach 

The current BCBS standard treats public blockchains worse than private blockchains. We tend to agree that there are different, possibly additional risks in holding assets on a public chain. However, these risks can often be managed through appropriate risk assessment and controls rather than through broad restrictions that may effectively limit banks’ ability to hold such assets.  

An alternative approach could focus on identifying and assessing specific, measurable risk factors associated with blockchain infrastructure. These may include, for example, governance structures, validator concentration, operational resilience, and the degree of settlement finality provided by the network. Evaluating blockchain systems against such criteria would allow regulators to better capture the actual risk profile of a given arrangement rather than relying primarily on whether a network is public or private. 

Instead of a blanket exclusion of permissionless blockchains, specific risk factors should be identified and addressed. For example, Hybrid blockchains or layer 2 solutions can be used to achieve faster and clearer settlement finality by introducing an additional layer of security on top of traditional consensus mechanisms in order to minimise risks to banks. 

Recommendation 4: Clarify Custody 

It remains unclear to many whether holding cryptoassets in custody would require financial institutions to hold capital against them, which could deter banks from offering important consumer protections. In cases where institutions act solely as custodians and do not take proprietary positions, it would be helpful for the framework to clearly reflect the limited nature of the associated risk. If banks are discouraged from providing custody services, retail investors and consumers could be left more vulnerable. While prudential regulation may not prioritise this as a top concern, it is a vital aspect of protecting ordinary people – the very individuals that international standards ultimately aim to safeguard. 

Conclusion 

We urge the Basel Committee to revise its standards to ensure they reflect the principles of technology neutrality and same risk, same regulation, and to consider a more nuanced approach to defining and categorising cryptoassets. By doing so, we can foster a regulatory environment that supports innovation while maintaining robust financial stability. 

We would welcome further discussions on this topic with yourselves and our members. 

Yours sincerely, 

Nandini Sukumar, Chief Executive Officer, World Federation of Exchanges 

Richard Metcalfe, Head of Regulatory Affairs 

James Auliffe, Regulatory Affairs Senior Manager 

 

---

¹ RECOMMENDATIONS TO THE COMMODITY FUTURES TRADING COMMISSION GLOBAL MARKETS ADVISORY COMMITTEE BY THE DIGITAL ASSET MARKETS SUBCOMMITTEE 6 March 2024 DIGITAL ASSETS CLASSIFICATION APPROACH AND TAXONOMY

 

About the World Federation of Exchanges (WFE):

Established in 1961, the WFE is the global industry association for exchanges and clearing houses. Headquartered in London, it represents the providers of over 250 pieces of market infrastructure, including standalone CCPs that are not part of exchange groups. Of our members, 37% are in Asia Pacific, 43% in EMEA and 20% in the Americas region. The WFE’s 87 member CCPs and clearing services collectively ensure that risk takers post some USD 1.1 trillion (equivalent) of resources to back their positions, in the form of initial margin and default fund requirements. The exchanges covered by WFE data are home to over 49,054 listed companies, and the market capitalization of these entities is over USD116.58tr; around USD155tr in trading annually passes through WFE members (at end-2024). 

The WFE is the definitive source for exchange-traded statistics and publishes over 350 market data indicators. Its free statistics database stretches back 50 years and provides information and insight into developments on global exchanges. The WFE works with standard-setters, policy makers, regulators and government organisations around the world to support and promote the development of fair, transparent, stable and efficient markets. The WFE shares regulatory authorities’ goals of ensuring the safety and soundness of the global financial system. 

With extensive experience of developing and enforcing high standards of conduct, the WFE and its members support an orderly, secure, fair and transparent environment for investors; for companies that raise capital; and for all who deal with financial risk. We seek outcomes that maximise the common good, consumer confidence and economic growth. And we engage with policymakers and regulators in an open, collaborative way, reflecting the central, public role that exchanges and CCPs play in a globally integrated financial system. If you have any further questions, or wish to follow-up on our contribution, the WFE remains at your disposal. ^[1] 

Website: www.world-exchanges.org

Twitter: @TheWFE

[1] Our EU Transparency Register number is 973382524675-69

---