September 10, 2021
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: “Prudential treatment ofcryptoasset 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: “Prudential treatment of cryptoassetexposures”2 (the Proposal) released on June 10, 2021.
As per the JBA’s previous comments3 on the BCBS’s discussion paper, the JBA is of the view that relatively
conservative prudential treatments for high-risk cryptoassets may be warranted at this juncture, given the risks
associated with cryptoassets are yet to be fully tested. However, we also stressed that those treatments should
be provisional and be iteratively revised, given that the cryptoasset ecosystem has been evolving rapidly inrecent years and various products related to cryptoassets have emerged with different risk characteristics. We
believe that prudential treatments should be proportional to the respective risk profile of the cryptoassets.
Having written that, we understand that the Proposal is to provide a proportional approach based on the risk
characteristics of the respective cryptoassets, which we are basically supportive of. We also appreciate that many
aspects of our comments on the discussion paper were reflected in the Proposal, such as a provisional (iterative)
approach, the concept of “technology neutrality”, the treatment of those jurisdictions that prohibit their banksfrom having exposures to cryptoassets, and the treatment of those dematerialised securities that use electronic
versions of traditional registers and databases.
On the other hand, it is unclear to us whether the Committee is going to consider a global regulatory frameworkfor non-banks based on the principle of “same risk, same activity, same treatment”. As we stressed in our
response to the discussion paper, we believe that “[e]ven if 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 or transacted widely outside the banking system in the future,bank-only regulations can deteriorate global financial stability rather than ensure it”.
Unregulated or underregulated entities such as Fintechs or Bigtechs have already started providing financial
service related to cryptoassets. Their core businesses are not banking services and are not within the scope ofbanking regulations. Establishing a regulatory framework only for banks would be insufficient for enhancing
financial stability and would result in unequal regulatory treatments, which is undesirable in terms of a levelplaying field.
Therefore, we encourage again the BCBS to establish a global regulatory framework for non-banks that engage
in cryptoasset-related business, collaborating with other international standard setting bodies such as theFinancial Stability Board and IOSCO or G20, while continuing globally open discussions with all stakeholders
across industries.
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The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers associations inJapan. As of September 10, 2021, JBA has 114 Full Members (banks), 3 Bank Holding Company Members (bank holding companies),
74 Associate Members (banks & bank holding companies), 58 Special Members (regionally-based bankers associations) and one SubAssociate Member for a total of 250 members.
2 https://www.bis.org/bcbs/publ/d519.htm
3 https://www.zenginkyo.or.jp/fileadmin/res/en/news/news200313.pdf

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Our response to the questions
Q3. What are your views on the classification conditions? Are there any elements of theseconditions that should be added, clarified or removed in order to:− ensure full transferability, settlement finality, and/or redeemability;− limit regulatory arbitrage, cliff effects and market fragmentation; and− take account of new and emerging cryptoassets?
We recommend further discussion and development of global common definitions regarding transferability,
settlement finality and/or redeemability because those definitions are generally closely related to statutory,
common or case laws in each jurisdiction and their international consistency is unnecessarily assured. In theabsence of such definitions, every country needs to set its own definitions or standards, which may result inclassifying a cryptoasset into different categories, for example Group 1b or Group 2. In that case, cryptoassets
would have stronger interconnectedness with the banking system without being required sufficient capitalcharges in the jurisdiction where those definitions are loose enough to be regarded as Group1b. Such an
unfavorable result will raise concerns over the concentration risk associated with cryptoassets, such as credit
risk and market risk in that jurisdiction. To avoid such concentration of cryptoasset-related risks due tofragmentated regulations, we believe that it is necessary to take stock of these definitions in each jurisdiction
and develop global common definitions or standards.

Q4. For the first classification condition, is there an alternative methodology to assess theeffectiveness of the stabilisation mechanism of Group 1b cryptoassets? Would this proposed
methodology be consistent with ensuring the effectiveness of the stabilisation mechanism
while also being practical?
The Proposal requires “a monitoring framework in place verifying that the stabilisation mechanism isfunctioning as intended” as one of the conditions for Group 1 cryptoassets. However, in cases where a bankinvests in an external investment fund/trust that holds cryptoassets with the stabilization mechanism (iestablecoins) as part of the fund/trust’s portfolio or as a result of dividends from investee companies, it is almost
impossible for the bank to conduct such monitoring by themselves, because the bank has no direct relationshipwith the redeemer of the crypoassets. In that case, it is highly likely that the 1,250% risk weight will be applied
as Group 2 cryptoassets, since the monitoring requirements for classifying in Group 1 are not met. It also may
result in contradictory outcomes that the capital charges for direct holdings becomes lower than those for indirect
holdings. We therefore propose adding complementary conditions that allow banks to monitor the stabilization
mechanism through the asset manager of the external fund/trust, subject to the conditions where the bank isregularly reported the result of the monitoring by the asset manager and verifies whether the monitoring iseffectively functioning.

Q7. Do you consider the responsibilities of banks and supervisors to be clear and appropriate?
Are there any other responsibilities for banks or supervisors that the Committee should
consider?
It is appreciated if the BCBS could provide support to address practical challenges, such as providing aconsistent reporting template. We note that the Proposal requires banks to demonstrate to supervisors how acryptoasset fulfils the classification conditions, as set out in section 1.2. However, internationally active banks
would be required to demonstrate to both home and host supervisory authorities the rationale of thecategorisation at every single level of each entity or subsidiary. If the respective reporting templates, glossaries
or reporting requirements are diverse among jurisdictions, it would pose unreasonable resource constraints andoperational burdens on banks and also makes it difficult for them to ensure international consistency of thereporting. Therefore, they should be coordinated globally.

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Q10. Do you have any views on the Committee’s current thinking on the capital requirements
for Group 1b cryptoassets?
The possibility of assessing and quantifying risks associated with Group1b assets should be explored, before
concluding to exclude them from eligible collateral. The Proposal notes that “Group 1b cryptoassets (iestablecoins), including those that can be redeemed for traditional instruments that are included on the list ofeligible collateral, are not eligible forms of collateral in themselves for the purposes of recognition as credit
risk mitigation. This is because, as discussed further below, the process of redemption adds counterparty riskthat is not present in a direct exposure to a traditional asset.” However, the counterparty risk is not necessarily
the decisive reason for such exclusion. At least, counterparty risk can be deemed to be effectively zero undercertain conditions, as discussed in our response to Q14.
In addition, the RWA calculation method for cryptoassets in illustrative example 1 seems to have a “fallacy ofcomposition”. The proposal notes that “[t]o calculate RWA for cryptoassets in illustrative example 1, the bankmust include in risk-weighted assets the sum of the following two amounts: (i) the risk weighted assets applicable
to a direct holding of the underlying traditional asset, (ii) the value of the cryptoasset holding multiplied by therisk weight applicable to an unsecured loan to the redeemer”. The respective RWA calculation methods forexposure to the underlying asset and to the redeemer are generally understandable. However, in some cases,simply adding up the two elements, the total risk weight for exposure to Group1b cryptoassets could go beyond
1,250%4, which is unintendedly even higher than the risk weight for Group 2 cryptoassets. This is because theproposed method is using the same exposure twice for calculating the synthetic RWA. To avoid such fallacy ofcomposition, we propose putting a cap at 1,250% for this calculation method.
Q14. Do you have any views on the Committee’s current thinking regarding the leverage ratio,
large exposures framework and liquidity ratio requirements? Are there further aspects of theserequirements that could benefit from additional guidance?
The Proposal notes that “cryptoassets would not qualify as eligible high-quality liquid assets (HQLA). However,
the Committee will continue to investigate the prospect”. We are of the view that certain types of cryptoassets
with a stabilization mechanism should qualify as eligible HQLA for liquidity requirements, when thecounterparty risk can be deemed to be effectively zero, in case where, for example, the underlying asset isclassified as HQLA and the purchase clause for that cryptoasset is secured. Otherwise, a clear rationale for the
proposed treatments should be provided.

Q18. Do you have any views on the potential design of disclosure requirements?
The Proposal notes that “[i]n accordance with the general guiding principles, banks must disclose information
regarding any material Group 1a, 1b and Group 2 cryptoasset exposures on a regular basis”. However, theterm “material” is not defined either in the proposal or in the general guiding principles5 and may be interpreted
in a variety of ways, including strategic importance, the importance in profit, or systemic importance to theglobal financial system. We urge to clarify or give further consideration regarding the term “material”.

(End)

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For example, under the IRB approach, the combined risk weight for exposure to the underlying asset and to the redeemer could go
beyond 1,250%.
5 Guiding principles of banks’ Pillar 3 disclosures3