Response to consultation on Regulatory Technical Standards on the calculation and aggregation of crypto exposure values
Q1: Do you agree that fair-valued crypto-assets within the scope of MiCAR should be included within the scope of the prudent valuation rules? If not, please explain.
The EBA mandate described in CRR 501d5 refers to those assets mentioned in 501d2(b) and (c). This means that exposures to tokenised traditional assets (such as e-money tokens, or EMTs) are outside the scope of the RTS. Accordingly, pursuant to the mandate given to the EBA, it should be clarified that the question of the application of the prudent valuation rules in the present CP arises only with regard to crypto assets mentioned in 501d2(b) and (c).
Crypto assets which are financial instruments or commodities and are valued at fair value under the applicable accounting framework, are already subject to the requirements for prudent valuation in accordance with Article 105 of Regulation (EU) No 575/2013 and Commission Delegated Regulation (EU) 2016/101. However, as also reported in the draft RTS, the IFRS recognized that a holding of cryptocurrency is not a financial asset or commodities. Having said that, we notice that changing the PV scope of application in this RTS would lead to a more complex regulation where the PV scope is defined in two different RTS. It seems reasonable to discuss the inclusion of crypto assets in PV scope within the currently ongoing revision of the RTS on prudent valuation. Accordingly, we propose to remove Article 1 from the RTS.
In addition, the rules for exposures to crypto assets are already very prudent (e.g. 1250%) and even more in the case of Europe (RW=250%). Given this conservativeness, applying an additional layer of conservatism, such as the prudent valuation adjustment (deduction from capital), seems excessive. Looking ahead, the authorities also should avoid double counting in the risk weighting of crypto asset exposures, i.e. the future Level 1 / EC Basel rules for crypto asset exposures, plus the Level 2 rule stipulating that firms hold capital for valuation uncertainty. Therefore, we would strongly recommend that the Basel framework is used as the reference for conservatism, in particular with a view to ensure a level playing field for banks.
Q2: Do you have any concern in relation to the application of the requirements specified in Arti-cle 105 CRR and Delegated Regulation (EU) 2016/101(RTS on Prudent Valuation) to crypto-assets? If so, please explain.
In the context of simplification and coherence in the PruVal framework, we ask that any amendments, present or upcoming, to PruVal related to the framework for crypto assets be consolidated within Delegated Regulation 2016/101. The inclusion of crypto assets within the Prudent Valuation scope of application should ensure that both financial instruments on crypto assets and the underlying crypto asset are treated in same way, to avoid possible unbalanced exposures and consequent AVA increase.
The inclusion of crypto assets within the Prudent Valuation scope of application should ensure that both financial instruments on crypto assets and the underlying crypto assets are treated in same way, to avoid possible unbalanced exposures and consequent AVA increase.
The cumulative application of the prudent valuation rules and the 1250% risk weight would lead to a disproportionate capital requirement (double penalty). Indeed, a 1250% risk weight is a 100% capital allocation to the asset value, equivalent to the CET1 deduction of the full value. If the Prudent value deduction (direct impact on CET1) also applies to the same cryptocurrency asset value, this would lead to a cumulative CET1 deduction superior to the asset value.
The explanatory text states that crypto-assets “give rise to significant valuation uncertainty”. This sentence is actually false in a number of important cases: for example, main crypto-currencies (e.g. Bitcoin) and listed derivatives written on crypto-currencies (e.g. Futures on Bitcoin) display significant market liquidity and small bid-ask spreads, leading to classification at level 1 in the fair value hierarchy and null Additional Valuation Adjustments (AVA). We report in Appendix 2 market evidence supporting this point. Accordingly, we suggest to avoid this undue generalization in the RTS.
Q3: Do you agree that a one-size fits all RW of 250% should apply also to CCR transactions requiring specifications on netting set treatment (Alternative A) or do you prefer using the counterparty’s RW as is standard in CCR (Alternative B)? Please briefly justify your assessment.
Alternative B should be the preferred option as it is in line with the Basel crypto and generale treatment. The counterparty credit risk on derivative/SFT transactions is on the counterparty and so should be risk weighted using the risk weight of the counterparty. A bespoke one-size-fits-all counterparty risk weight based on an underlying notional asset does not make sense and is inconsistent with the existing CCR framework. Concerns about CCR exposure to Asset Referenced Tokens should be addressed through volatility parameters in the exposure calculation. Alternative B is consistent with the existing frameworks and easier to implement for institutions.
In addition, the 250% are an addition in CRR3 that does not exist in the Basel crypto text and does not reflect the thorough analysis carried out by Basel on crypto, and should not be used for CCR. For the sake of clarity, this should also apply to crypto assets treated at 1250% in CRR3: their CCR should be associated with the counterpart’s RW, not 1250%.
Q4: Are there any credit institutions considering implementing the alternative internal model approach during the transitional period, or consider implementing it in the medium to long term? Would there be an impact for the development of the crypto-assets market in the EU, and/or for the capitalisation and/or business activities of European credit institutions, if the use of the alternative internal models approach in the short to medium term is not permitted?
Despite the limited application of the IMA approach among EU banks, not having an option to use of the IMA will undermine the development of the crypto-assets market.
In recent years, listed crypto assets have exhibited trading volumes and volatility comparable to those of other risky assets (see Appendix 1) with a correlation dynamic that could support diversification and risk reduction (see e.g. “Bitcoin a Unique Diversifier”, Blackrock Sept. 2024). The market has matured significantly, and pricing for many crypto assets is now both feasible and increasingly reliable. Unlike the EU, other jurisdictions have not adopted such a restrictive stance. A disproportionate approach banning the usage of FRTB A-IMA for crypto-asset exposures would introduce further constraints on the development of the crypto-assets market and of business activities of European credit institutions in the EU, lowering their competitiveness with credit institutions under different jurisdictions and further discouraging the adoption of FRTB A-IMA. Noticeably, the proposed usage of FRTB A-SA, based on crypto-assets sensitivities, would leverage on the same pricing capability required by the usage of FRTB A-IMA.
Q5: Do you agree that the risk of default of the issuer is relevant in certain specific circumstances and therefore should be considered within the scope of this draft RTS during the transitional period or do you believe that the 250% RW for direct credit risk is sufficient to capture for this risk during the transitions period? Please briefly justify your assessment.
The risk of default of the issuer is relevant, but does not need to be considered as part of the 250 RW. As stated in our response to question 3, a 250% RW that applied consistently in a one-size-fits-all approach is inconsistent with the existing CCR framework and deviates from the Basel Standard. We support alignment with the Basel Standard (i.e., Alternative B), which takes into account the risk of the default of the issuer and is also consistent with the current CCR framework.
Q6: How relevant is it to incorporate this differentiation for crypto-assets exposures referred to in Article 501d (2), point (c), of the CRR at this stage? Are institutions confident that they can assess their crypto-assets exposures against the criteria set out in these draft RTS? Is there sufficient market data available to make those assessments?
We welcome the differentiation that is made to attempt to separate 2a from other crypto assets.
The referenced prudential distinction between liquid and illiquid crypto assets is essential. We consider that adequate market data is available for an assessment of liquid crypto assets.
Q7: For ARTs subject to the calculation of own fund requirements for market risk in this para-graph, do you agree that the risk of default of the issuer is relevant in certain specific circum-stances and therefore should be considered within the scope of these draft RTS during the tran-sitional period as per Article 3(4)(d) or do you believe that the 250% RW for direct credit risk is sufficient to capture for this risk during the transitions period? Please briefly justify your as-sessment.
Positions which include exposures to ART issuer default risk should include an assessment of the appropriate capital requirement. This should be done in line with the Basel framework for ART exposures.