On September 30th, Circle submitted comments on the Basel Committee on Banking Supervision's (BCBS) draft chapter regarding the prudential treatment of cryptoasset exposures. The BCBS is a committee of the Bank of International Settlements which sets global standards for the prudential regulation of banks, i.e. what requirements banks must follow to maintain proper safety and soundness. The standards set by the BCBS are implemented by committee members in national jurisdictions.
The BCBS sought input from stakeholders about its proposed standards for the prudential treatment of banks’ cryptoasset exposures. Once implemented, these rules will determine how, and to what extent, banks and their clients can interact with cryptoassets. Circle believes that digital currencies such as USDC and EUROC will make the global financial system more open, inclusive, and efficient for people to send, save, and secure money in every corner of the world. As such, we suggested changes that would make it more convenient and less capital-intensive for banks to engage with and hold tokenised cash stablecoins such as USDC and EUROC. Specifically, the response commented that:
- The Committee’s monolithic treatment of all "stablecoins" as a single group is overly broad; even amongst fully reserved stablecoins, there is a wide range in reserve-backing, design, safety, and stability of different tokens.
- Drawing on our recent study of systemic risks, we show that "tokenised cash" stablecoins (tokenised versions of cash and cash equivalents) such as USDC hold reserves that are more liquid and of higher quality compared to tokenised deposits.
- We recommended tokenised cash stablecoins to be considered as "Group 1a" cryptoassets, reflecting their lower risk profile. Banks should not generally be required to maintain extra capital to hold tokenized cash as assets on balance sheets.
- The add-on for infrastructure risk, while sensible to consider, should be quantitatively derived. Prudential supervisors should rely on multiple data inputs to assess the relative performance of novel technological infrastructure compared to existing systems.
- Circle recommends that tokenised cash receive pass-through treatments for the Liquidity Cover Ratio and Net Stable Funding Ratio. Supervisors could calculate pass-throughs based on the HQLA backing of a particular token.
Key Points and Excerpts
Tokenised cash stablecoins as Group 1a cryptoassets
- "…Broadly categorising all 'stablecoins' as Group 1b, defined as 'cryptoassets with effective stabilisation mechanisms,' would introduce confusions that run contrary to the risk-based approach adopted by the Committee… Fundamentally, not all stablecoins are alike and some convey inherently less risk than others. In particular, 'tokenised cash,' or a stablecoin fully reserved by cash and cash equivalents and operating at a high standard, has reserve holdings that are safer than tokenised deposits, which the BCBS classifies as Group 1a."
- "Payment stablecoins that are predominantly backed by tokenised cash and cash equivalents, such as short-term government obligations of the highest quality and liquidity, should be considered 'tokenised cash.' Tokenised cash carries lower market risk, lower credit risk, and higher liquidity relative to 'tokenised deposits.' Tokenised cash likewise does not inherently involve additional counterparty credit risk when the reserves are wholly held in segregated accounts and designated for the benefit of tokenised cash holders, as is the case for Circle’s USDC. With a proper resolution and recovery framework, tokenised cash can allow users to have the same level of legal rights as ownership of the underlying traditional assets."
- "Circle believes that BCBS should consider clarifying the classification conditions for group 1a digital assets to incorporate properly designed and regulated tokenised cash payment stablecoins that are issued by banks and non-banks alike."
The add-on for infrastructure risk should be quantitatively derived
- "Circle broadly agrees with the BCBS that the underlying technological infrastructure (of payments systems) presents risks, but it suggests that any add-on for infrastructure risk must be quantifiably derived… As noted in a recent BIS report, close to $9 trillion of foreign exchange transactions a day are not cleared through a Payment vs Payment (PvP) settlement system. In comparison, one-hundred percent of settlements on blockchains adhere to PvP principles… Banks and their supervisors should compare the past performance of distributed networks to derive a quantitative add-on or discount for infrastructure risk specific to the particular asset and blockchain… Finally, the Committee, banks, and supervisory authorities should retain flexibility in adjusting the infrastructure risk add-on as blockchain technologies mature."
Pass-through treatments for LCR and NSFR should apply to qualified payment stablecoins
- "The HQLA portion of assets reserving tokenised cash is less risky than the deposits that reserve tokenised cash. The Committee should provide clarity for banks on how they should calculate the liquidity risk of such pass-through instruments. The most transparent tokenised cash stablecoins publish monthly attestations by a certified public accountant that verify the composition of the stablecoin’s fiat reserve. Supervisors assessing the liquidity risk of a specific tokenised cash stablecoin could use the attested-to proportion of HQLA backing a tokenised cash stablecoin to compute the pass-through stock of HQLA."
Circle is a global financial technology company helping money move at internet speed. Part of this mission is building with a careful, cautious approach that plans for the future and preserves trust. Circle appreciates the Basel Committee’s engagement with key stakeholders and always welcomes opportunities for engagement.