The Banking Policy Department of the Hong Kong Monetary Authority (HKMA) published a circular (BCBS Statement on Crypto-Assets)1 on 18 March 2019 in light of a newsletter by the Basel Committee on Banking Supervision (BCBS) on 13 March 2019, stating the BCBS' prudential expectations regarding banks’ exposures to crypto-assets and related services. The HKMA expects banks to take note of the BCBS’ statement and its prudential expectations, and to discuss with the HKMA when planning to engage in activities relating to crypto-assets and demonstrate that they have put in place appropriate systems and controls to identify and manage any risks associated with such activities.
While the BCBS acknowledges that the crypto-asset market remains small relative to the global financial system, they anticipate that the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks.2 In view of the immature and high-risk nature of this asset class, the BCBS expects that banks acquiring crypto-asset exposures or providing related services to adopt the following measures at a minimum:3
- Due diligence –
- To conduct comprehensive analyses of the risks (including liquidity risk, credit risk, market risk, operational risk (including fraud and cyber risks), money laundering and terrorist financing risk, and legal and reputation risks) presented by crypto-assets prior to acquiring exposures.
- To engage relevant and requisite technical expertise to adequately assess the risks stemming from crypto-assets.
- Governance and risk management –
- To implement a clear and robust risk management framework that is appropriate for the risks of the bank's crypto-asset exposures and related services. The risk management framework for crypto-assets should be fully integrated into the overall risk management processes.
- To implement risk management processes that are consistent with the high degree of risk of crypto-assets.
- To involve the bank's relevant senior management functions in overseeing the risk assessment framework, and to provide the board of directors and senior management with timely and relevant information related to its crypto-asset risk profile.
- To incorporate an assessment of risks related to direct and indirect crypto-asset exposures and other services as part of the bank's internal capital and liquidity adequacy assessment processes.
- Disclosure – to publicly disclose any material crypto-asset exposures or related services as part of the bank's regular financial disclosures, and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.
- Supervisory dialogue – to inform the bank's supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner, and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks.
The BCBS is expected to publish further clarification on the prudential treatment of crypto-assets in due course, and banks should keep an eye out for the latest developments in prudential regulation in relation to crypto-assets.
1 Hong Kong Monetary Authority (2019) 'BCBS Statement on Crypto-Assets', Guidelines & Circulars B1/15C B9/196C [online]. Available at: <https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20190318e1.pdf> (Accessed: 19 March 2019)
2 Basel Committee on Banking Supervision (2019) 'Statement on crypto-assets' [online]. Available at <https://www.bis.org/publ/bcbs_nl21.htm> (Accessed: 19 March 2019)