CENTRAL BANKS TO START HOLDING CRYPTO ON THEIR BALANCE SHEETS

The Bank of International Settlements, BIS, recently released a report titled “ Prudential Treatment of Crypto Asset Exposure.” According to this report, the BIS, which essentially is the Central Bank for all Central banks, released guidelines and operating procedures on how Central Banks can own crypto assets on their portfolios. This comes as a surprise considering the BIS and Central Banks around the world have been increasingly vocal in their opposition towards decentralized cryptocurrencies and stablecoins. This article summarizes this report and lists some of the key highlights the report.

Details of the Report

The guidelines listed in the report are to be implemented by the 1st of January 2025. The report contains standards that will be used by Central Banks across the world to purchase crypto assets and include them on their balance sheets. It was drafted in close consultation with central bank Governors across the world. The aim of this report is two-fold: Firstly, to provide guidelines through which Central banks across the world can hold crypto assets. Secondly, the report aims to preserve financial stability across the globe.

Crypto Asset categories

According to the standard issued, crypto assets will be grouped into two categories: Group 1 and Group 2. Group 1 (a) crypto assets will include tokenized security assets such as stocks and bonds.Group 1 (b) will include centralized stablecoins. Group 2 (a) crypto assets include all decentralized cryptocurrencies as such ETH and BTC. For crypto to be considered as Group 2 (a) crypto, then it has to have a market cap of over $10 billion and a daily trading volume of over $ 50 MILLION. Group2 (b) crypto lumps together all other alt-coins

Before a central bank opts to purchase any crypto assets, there are additional requirements that should be met. Additionally, a rigorous risk test will be carried out to know whether to place a crypto asset in Group 1 or Group 2. Also, if an asset is placed as a group 2 asset, then there is a maximum exposure limit- the maximum amount that can be invested. This exposure limit is currently set at not more than 2% of the bank’s total capital.

Role of BIS in Crypto regulation.

The roles that BIS will play in implementing these new guidelines will be as follows:

· Monitoring the implementation of the standards stated in the report

· Make additional changes and improvements to the report

· Monitor central banks across the world as they implement these new standards.

Central banks will also be required to report to the BIS the crypto assets they are holding and consult with the BIS before classifying a crypto asset as either Group 1 or Group 2. Though not explicitly stated, this essentially means that the BIS will have a sole mandate on giving the go-ahead on whether a central bank can make purchases and how to grade the various crypto assets.

Conclusion

Industry insiders agree that this move may prove to be bullish for crypto assets and especially BTC as central banks have the capacity to provide immense liquidity to the crypto market. However, we also run the risk of centralizing some of these crypto assets as central banks have ‘limitless’ capital to buy large amounts of any particular asset and wield control over it. A good example of how Central banks may wield control over crypto is through the use of synthetic stable coins- basically, stablecoins that have been issued using the native currency of a given country. It is interesting to note that this report mentions nothing about CBDCs. It is assumed that the BIS know that some central banks may lack the technical capacity to implement CBDCs within their jurisdictions. Synthetic stablecoins seem to be a viable option at this stage. Having a huge stake in these stablecoins essentially means that Central banks can have a say in their performance.

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