HKMA Sets Out Expectations in light of BCBS’ Statement on Crypto-Assets

The Banking Policy Department of the Hong Kong Monetary Authority (HKMA) issued a circular (see HKMA’s BCBS Statement on Crypto-Assets, available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20190318e1.pdf) on 18 March 2019 in light of a newsletter (Newsletter) (see Basel Committee on Banking Supervision’s 2019 publication, ‘Statement on crypto-assets’, available at https://www.bis.org/publ/bcbs_nl21.htm) released by the Basel Committee on Banking Supervision (BCBS) on 13 March 2019. The BCBS, which is housed under the Bank for International Settlements, is the primary global standard setter for the prudential regulation of banks and its members, comprising central banks and bank supervisors from 28 jurisdictions, including Hong Kong.

In the Newsletter, the BCBS warned that crypto-assets, which it differentiates from central bank digital currencies (see Committee on Payments and Markets Infrastructures and Markets Committee, Bank for International Settlements’ 2018 publication, ‘Central Bank digital currencies’, available at https://www.bis.org/cpmi/publ/d174.pdf), is an immature and high-risk asset class which does not provide the standard functions of money and should not be regarded as a reliable substitute for money. Despite that the size of the crypto-asset market remains small relative to the global financial system and that banks currently have limited direct exposure to crypto-assets, the BCBS is of the view that the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets pose threats to financial stability and increase risks faced by banks (see Basel Committee on Banking Supervision’s 2019 publication, ‘Statement on crypto-assets’, available at https://www.bis.org/publ/bcbs_nl21.htm).

In this regard, the BCBS sets out their prudential expectations regarding banks’ exposures to crypto-assets and related services, and expects banks to adopt the following measures at a minimum:

1. Due Diligence –

a. To conduct comprehensive analyses of 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.

b. To engage relevant and requisite technical expertise to adequately assess the risks stemming from crypto-assets.

2. Governance and Risk Management –

a. 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.

b. To implement risk management processes that are consistent with the high degree of risk of crypto-assets.

c. 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.

d. 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.

3. 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.

4. 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 HKMA expects banks to take note of the BCBS’ cautious approach to crypto-assets and prudential expectations as set out in the Newsletter. Prior to acquiring any crypto-asset exposure, banks should engage the HKMA and are expected to demonstrate that they have put in place appropriate systems and controls to identify and manage any risks associated with such activities.

The BCBS will 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.

Jurisdictions: 

Partner of Mayer Brown and head of the Financial Services Regulatory & Enforcement practice in Mayer Brown’s Hong Kong office

Registered Foreign Lawyer in the Financial Services Regulatory & Enforcement practice in Mayer Brown’s Hong Kong office