On Thursday (May 12), Pablo Hernández de Cos, chair of the Basel Committee on Banking Supervision and governor of the Bank of Spain, warned that fast-paced developments in decentralized finance (DeFi) and crypto assets necessitate a proactive and forward-looking regulatory and supervisory approach.
In a speech delivered at the 36th Annual General Meeting of the International Swaps and Derivatives Association in Madrid, Hernández de Cos suggested that while crypto assets and DeFi still represent less than 1% of total global financial assets and banks’ exposures are relatively limited, an appropriate response is to bring these areas within the relevant regulatory perimeter.
“Despite our better understanding of crypto assets and DeFi, the jury is still out when it comes to ascertaining how best to harness their oft-cited promises and benefits, while mitigating their risks and safeguarding financial stability,” Hernández de Cos said.
The committee’s chair also raised some doubts about the future of these digital assets and whether they will deliver what they have promised. Despite some assets being considered “stable” and “currencies,” they often fail on both counts, Hernández de Cos argued. These remarks came just a few days after some of the most popular stablecoins like TerraUSD and Tether dropped their value and it also caused a crash in some cryptocurrencies like Luna (which is associated to TerraUSD).
See also: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos
The Basel Committee that Hernández de Cos chairs has a mandate to strengthen the regulation and supervision of banks worldwide. While the banks’ exposures to these assets are still limited, he is calling for a forward-looking approach to regulation and supervision to ensure that prudential regulation is in place to mitigate additional risks.
In this regard, the committee published an initial consultation paper in 2021 that proposed a regulatory approach that differentiates among three types of crypto assets: tokenized versions of traditional assets, stablecoins and all other crypto assets. The committee also consulted on new disclosure requirements related to banks’ crypto asset exposures.
The findings of this consultation paper will be published in due course, but Hernández de Cos gave the audience his opinion on these issues.
Prudential regulation should reflect the level of knowledge regulators have when it comes to new asset classes — including, in this case, the lack of historical data to measure and mitigate risks. Thus, diluting bank capital requirements because of a fear that crypto asset activities will migrate outside the regulated banking system is not a convincing argument, Hernández de Cos argued. Especially because as bank’s exposures are currently limited, there is very little activity that could be shifted.
There are different ways to bring crypto assets within the relevant regulatory perimeter, Hernández de Cos explained. This could be done by regulating such markets directly and/or by requiring crypto asset activities to be subject to existing regulatory standards, including bank prudential standards where appropriate.
To conclude, Hernández de Cos flagged the cross-border nature of crypto assets and how effective collaboration across global standard-setting bodies will be required to answer some policy questions regarding taxation, anti-money laundering (AML), compliance and data privacy.
Push to Regulate Stablecoins
The recent collapse of the stablecoin TerraUSD has sparked a debate as to whether stablecoins should be regulated. Speaking to the Senate Banking Committee on May 10, Treasury Secretary Janet Yellen pointed out that the ongoing collapse “simply illustrates that [stablecoins are] a rapidly growing product.”
Read more: Push to Regulate Stablecoins Gains Momentum as TerraUSD Spirals
“There are risks to financial stability and we need a framework that’s appropriate,” she added.
The European Union is seeking to pass the Markets in Crypto-Assets (MiCA) regulation that will impose strict rules for stablecoin issuers, and if the stablecoins are of significant importance, the regulatory oversight will be stricter.
Mairead McGuiness, the European commissioner for financial services, recently pushed for global coordination of crypto regulation.