Financial Industry Bodies Push Back Against Basel Committee’s Treatment of Permissionless Blockchains

Five global financial industry bodies have come together to push back against the treatment of permissionless blockchains by the Basel Committee on Banking Supervision (BCBS), in a move that highlights the ongoing debate surrounding the regulation of digital assets.

In a report published in December, the BCBS proposed amendments to bank capital requirements for digital assets, stablecoins, and tokenized assets. The report classified all permissionless blockchains as high-risk, citing concerns about banks’ lack of control over third parties conducting operations on these blockchains, as well as risks related to privacy, finality, liquidity, and legal and policy issues.

In response, the International Swaps and Derivatives Association, the Global Financial Markets Association, the Institute of International Finance, the Futures Industry Association, and the Financial Services Forum issued a joint statement defending permissionless blockchains. They argued that the financial industry has the expertise and compliance frameworks necessary to identify, manage, and mitigate risks associated with these technologies.

The regulators emphasized the importance of not disincentivizing banks from exploring blockchain technology, warning that overly restrictive regulations could drive institutions towards unregulated shadow banking activities, which could pose greater risks. They pointed to successful pilot projects conducted by global banks using permissionless blockchains as evidence of the technology’s potential benefits.

The regulators criticized the BCBS for deviating from its traditional risk assessment approach and urged for a more nuanced understanding of the risks and opportunities presented by permissionless blockchains. They emphasized the need for banks to have the freedom to decide whether to adopt these technologies based on their specific use cases.

The financial sector has been at the forefront of blockchain adoption, with major institutions like JPMorgan developing their own permissioned networks. However, the regulators noted that many banks have opted to leverage existing solutions for applications such as settlement, bond issuance, and tokenization.

The ongoing debate over the regulation of permissionless blockchains underscores the complexities of integrating new technologies into the financial industry. As the industry continues to evolve, finding a balance between innovation and risk management will be crucial for regulators and financial institutions alike.