September 30, 2022
Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
CH-4002 Basel, Switzerland
Japanese Bankers Association

JBA comments on the BCBS Consultative Document: “Second consultation on theprudential treatment of cryptoasset exposures”
Dear Basel Committee members:
The Japanese Bankers Association1 (JBA) appreciates the opportunity to provide our comments on the BaselCommittee on Banking Supervision’s (BCBS) Consultative Document: “Second consultation on the prudential
treatment of cryptoasset exposures” (hereafter the “Proposal”) released on June 30, 2022.

General comments
The JBA supports the BCBS's development of the prudential treatment of cryptoasset exposures from the first
consultative document in light of the current rapid changes in the situation regarding cryptoassets. The JBA is
also supportive of some changes, such as the recognition of hedging of certain Group 2 cryptoassets andremoval of the accounting classification link.
On the other hand, while the JBA understands that the growth of cryptoassets and related services has thepotential to raise financial stability concerns and increase risks faced by banks, these prudential treatments
including the quantitative criteria on hedge recognition of Group 2 cryptoassets should be provisional and be
iteratively revised and updated, given that the cryptoasset ecosystem has been evolving rapidly in recent years
and various products related to cryptoassets have emerged with different risk characteristics. As appropriatequantitative threshold levels will vary because of the rapid expansion of the cryptoasset market and thedevelopment of the cryptoasset ecosystem, consideration should be given to making the framework simpler
and more flexible at this point in time, such as a holistic regulatory approach, including Pillar 2.
In addition, as noted in the GHOS statement dated September 13, 20222, members reiterated the importanceof designing a robust and prudent regulatory framework for banks’ exposures to cryptoassets that promotes
responsible innovation while preserving financial stability. In this regard, the Proposal, particularly theinfrastructure risk add-on and complex classification conditions, could unduly restrict businesses on
cryptoassets at banks, thus stifling innovation for cryptoassets and DLT of banks compared with otherindustries.
For example, DLT platform for issuance and distribution of security token is being considered by someThe Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations inJapan. As of September 30, 2022, JBA has 114 Full Members (banks), 3 Bank Holding Company Members (bank holdingcompanies), 77 Associate Members (banks & bank holding companies), 58 Special Members (regionally-based bankers associations)and one Sub-Associate Member for a total of 253 members.
2 https://www.bis.org/press/p220913.htm
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Japanese banks. This service is expected not only to improve the security and efficiency of securities settlement
infrastructures, but also to enhance customer convenience by reducing settlement risk through shorter
settlement cycle than existing infrastructures, reducing administrative costs and remittance fees andsecuritizing smaller lot of assets. The treatments in the Proposal, such as the infrastructure risk add-on, may
discourage financial institutions from developing new and useful businesses, as well as rule out possibility ofconducting such useful businesses. This could hinder responsible innovation.
The BCBS should design regulations that strike a balance between financial stability and responsible
innovation, taking into account the views of a wide range of stakeholders and in line with the above intent of
the regulations.
We have repeatedly stressed that the principle of “same risk, same activity, same treatment” is essential. As westressed in our response to the discussion paper3 and the first consultative document4, we believe that “[e]venif the banking system is shielded from risks of cryptoassets by the restrictive and conservative prudential
treatments, it does not necessarily ensure global financial stability as a whole. If crypto-assets are held ortransacted widely outside the banking system in the future, bank-only regulations can deteriorate global
financial stability rather than ensure it”.
Fintechs and Bigtechs have already started providing financial services related to cryptoassets and their impact
on the financial system is growing. In addition, non-banks are emerging, and the shadow banking issue hasrisen. Under these circumstances, imposing regulations only on banks will enable the use of cryptoassets
through non-regulated firms, which will not reduce the risks to financial stability.
If regulations are under consideration for cryptoassets, Fintechs, Bigtechs, and non-banks should also beincluded in the scope, not only banks. Therefore, discussions should not be taking place only at BCBS, butalso through globally open forums, such as the FSB and G20. As for the private sector, we would like to see
dialogs starting or continuing with various stakeholders, such as Fintechs and Bigtechs.

Removal of the infrastructure risk add-on
We do not believe that the infrastructure risk add-on is suitable for all DLT types and therefore should not beapplied evenly.
The risks that DLT-based products may face depend more on the integrity of the organization, such as risk
management or systems in place to prevent embezzlement, than on technical aspects. Therefore, we believe it
is more prudent to supervise the responsibilities and risk management of the DLT operators to mitigate risks.
If the DLT operators are composed of multiple entities, it would be unclear where responsibilities lie to deal
with issues that may occur, and we believe that clarification of such responsibilities and supervision is needed.

34https://www.zenginkyo.or.jp/fileadmin/res/en/news/news200313.pdf
https://www.zenginkyo.or.jp/fileadmin/res/en/news/news210910.pdf

2Even in cases where the DLT is run by a single entity, we believe that it would be better to manage the integrityof the DLT operator through risk management supervision to mitigate risks, as incidents where funds havebeen embezzled or stolen through hacking are known.
We do not believe that evenly applying the infrastructure risk add-on for all DLT types would be effective even
if the technical risks are taken into consideration as the degree of risks varies depending on how the DLT
product was built.
To meet the Group 1 cryptoasset classification conditions, all rights, obligations and interests arising from thecryptoasset arrangement are legally enforceable and the Group 1 cryptoasset requires that entities executeredemptions, transfers, storage or settlement finality of the cryptoasset, or manage or invest reserve assets.
Therefore, as described in the Proposal, it is highly unlikely that any cryptoassets based on permissionlessblockchains will be able to meet the classification conditions to be included in the Group 1 cryptoasset and we
describe permissioned DLT as follows.
As a consequence of the Group 1 cryptoasset classification conditions, a high level of security is required, thus
the system must be built using a secure software that meets such conditions and it will not matter if an existing
database or the DLT is used since there is little difference in security.
For example, to ensure finality in the system, there will be a need to use a DLT that is equipped withmechanisms to ensure such finality in place.
Some DLTs with such mechanisms use existing database products that are broadly used worldwide to record
ledgers and also widely used software to integrate data across multiple databases. Although there are somecomponents that are newly created for the DLT, such as the function to execute smart contracts and theconnection between database products and software, the main components of the DLT are the databaseproducts and software that are broadly used worldwide and considered to be highly secure, and no othertechnologies that would compromise security are introduced.
Hence, in order to meet the Group 1 cryptoasset classification conditions, there is a need to use a secure DLT
built with databases and software that are broadly used worldwide, and since the components of the DLT are
almost the same as existing databases products, there is no significant difference in security compared toexisting database products.
In addition, as noted in General comments, the infrastructure risk add-on may stifle responsible innovation.
For example, if all financial institutions participating in the above DLT platform were subject to theinfrastructure risk add-on, the burden would be greater than the benefit of participating in the platform, and as
a result, this could discourage financial institutions from developing new and useful businesses as well as
starting such businesses. From this perspective, the infrastructure risk add-on is unnecessary.

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Further revisions on the classification conditions
We support the alternative to the redemption risk test and basis risk test proposed in 60.17. Rather than leaving
it to holders to conduct and verify these tests, it is more effective and preferable to ensure the soundness ofissuers through supervision and regulation by a supervisor. Also, from the viewpoint of holders, confirmingthat the issuer is subject to regulation is sufficient, thereby reducing the burden.
Assuming that SCO 60.17 is realized, we would like to request that the classification conditions of cryptoassets
as described in the Proposal be revised in light of practical feasibility and clarification as follows.
- The redemption risk test requires in 60.13 (1) that [t]he value of the reserve assets (net all non-cryptoasset
claims on these assets) must at all times, including during periods of extreme stress, equal or exceed theaggregate peg value of all outstanding cryptoassets, but the timing and the frequency of this confirmationis unclear and should be clarified.
- Classification condition 2 requires that “[a]ll rights, obligations and interests arising from the cryptoasset
arrangement are clearly defined and legally enforceable in all the jurisdictions where the asset is issued
and redeemed”. This could be read as requiring that this condition be confirmed in all the jurisdiction inwhich the cryptoasset is distributed, but that is not practical. Therefore, the condition should be satisfied aslong as the reserve assets of the cryptoasset is secured in the respective jurisdictions in which the cryptoasset
is issued, not redeemed.
- We recommend further discussions and development of global common definitions regarding transferability,
settlement finality, and/or redeemability stipulated in the classification condition 2 as these definitions aregenerally closely related to statutory, common, or case laws in each jurisdiction and their international
consistency is not necessarily assured. Without common or harmonized definitions, each jurisdiction mayset their own definitions and standards, which may result in classifying a cryptoasset into different categories(for instance, Group 1b in jurisdiction A may be Group 2a in jurisdiction B). We believe that internationallyshared definitions and standards are needed to avoid potential concentration of cryptoasset trading injurisdictions with cryptoassets classified in low-risk groups by their definitions. Otherwise, the consequentconcentration of cryptoasset-related risks in certain jurisdictions may increase the risk of financial stability
due to regulatory fragmentation.

Scope of cryptoassets
The scope of cryptoassets in the Proposal is limited and the treatment in the following cases is unclear. We
would like to request clarification and propose these treatments as follows.
- Other tokenised traditional assets: While bonds, loans, claims on banks, equities, derivatives andcommodities are listed as tokenised traditional assets, the description should be more comprehensive sinceother assets such as real estate, aircraft, and ships may be commercialized as security tokens using DLT inthe future.

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- Positions held for STO services: We recognize that some companies use the STO scheme for their funding.
In the Proposal, it seems that there are no descriptions about STO and the group as which STO is classified
is not clear. However, the fundamental risk of STO is similar to the traditional assets because issuers have
similar responsibilities and duties with securities. Therefore, we would like STO to be classified into Group1a.
- Non-Fungible Tokens (NFTs): The first consultative document in footnote 5 on page 2 states that“[d]ecentralised Finance (DeFi) instruments or Non-Fungible Tokens (NFTs) meeting the definition ofcryptoassets are considered to be within the scope of this paper,” however there is no mention of NFTs in
the Proposal. NFTs have drawn attention in recent years, but as the actual value and risk of NFTs are notfully evaluated yet, we believe that it is premature to include them in the prudential regulatory frameworkat this time. A thorough analysis should be conducted to weigh the risks before considering a response fromthe perspective of prudential regulation.

Disclosure requirements
We agree to the idea that periodic disclosures of material cryptoassets are necessary as SCO 60.134 states.
However, we believe that “materiality” includes several aspects such as company strategy, company revenue,
impact on financial system due to size of exposure. Therefore, the definition of “material” should be clarified.
***

We thank the BCBS again for the opportunity to comment on the Proposal and hope our comments willcontribute to further consideration in the BCBS.
Yours faithfully,Japanese Bankers Association5