Bank of England’s Prudential Regulation Authority (PRA) wants businesses to report their current and planned crypto exposure by Mar. 24, 2024. The regulator has made the request as part of plans to enhance surveillance of financial stability in the UK. In the statement issued on Dec. 12, 2024, PRA pointed out that it will use the data to set up crypto policies under its financial reforms.
PRA will also use the information to evaluate risks associated with crypto and come up with necessary mitigations. The regulator also requires firms to elaborate on how they are benefitting from applying the Basel framework.
Understanding the Basel Framework
The Basel Framework is a structure that allows banks to identify standards governing capital and risk related to crypto assets. Basel Committee on Banking Supervision (BCBS) developed this framework in December 2022. The framework categorizes crypto into three groups based on risks.
As per BCBS, the framework assists banks in dealing with crypto-related issues, such as instability caused by crypto volatility. PRA also wants to know how businesses are using the Basel framework to manage their exposure to digital assets.
The data will enable the bank to develop an adequate relationship between various categories of crypto assets and financial stability. Additionally, the PRA has asked firms to consider their future crypto adoption plans till September 2029 in their report.
Concerns over permissionless blockchains
The Bank of England’s regulator (PRA) has raised concerns regarding the open and decentralized nature of blockchains that support cryptocurrencies. These blockchains provide transparency and decentralization, but they also have a number of threats.
A part of the PRA crypto asset data collection template read,
While there are benefits that these new types of ledgers can bring, they also pose risks such as lack of settlement finality or settlement failure. [There is also] no guaranteed link between the intended owner of the asset and the entity that may have control of the authentication/ validation mechanism.
As stated by the PRA, it is not in a position to manage the crypto risks sufficiently as of now. However, the regulator has not closed the issue concerning this classification of risk and regards it as a work in progress at the moment. Pursuant to these risks, the PRA is currently seeking responses from firms on permissionless blockchains.
Institutional adoption of crypto
Some cryptocurrency regulations have deterred the adoption of cryptocurrency at institutional level. But, recent shifts in regulations by some countries could see more firms accepting cryptocurrency at institutional level.
Late last month, for instance, a Hong Kong online gaming company, Boyaa Interactive International Company Ltd., exchanged about $50m of Ether (ETH) for Bitcoin (BTC). In Nov. 28, 2024, Japanese investment organization Metaplanet unveiled it has plans to raise over $62 million to boost its Bitcoin reserves.
Such actions indicate that the number of firms that have shifted their approach to cryptocurrency primarily due to emerging regulation issues is increasing. Some firms also believe that new rules can lead to new restrictive regulations that will increase the cost and regulatory compliance for holding and trading cryptocurrencies.
In July 2023, the UK financial regulator announced that crypto companies, whether UK-based or international, were required to register and pay a fee upon approval.
With the recent notice to report their crypto exposure by March 2025, most firms are revisiting their portfolios to make sure they are in the right state for the next phase.
Related | Argentina joins El Salvador to revolutionize crypto
