The Bank of England’s Prudential Regulation Authority (PRA) has announced that it will require businesses to disclose their current and future exposure to cryptocurrency by next March, as part of efforts to monitor financial stability and shape future policy. This move comes amid growing interest in cryptoassets, with firms increasingly integrating digital currencies into their financial strategies.
In a statement released on December 12, the PRA asked firms to submit detailed reports on their “current and expected future cryptoasset exposures.” This will include an explanation of how businesses are utilizing the crypto-regulating Basel framework, which sets capital and risk management requirements for banks’ crypto holdings.
The Basel framework, introduced in December 2022 by the Basel Committee on Banking Supervision (BCBS), provides a global standard for regulating cryptoassets in traditional financial institutions. The PRA emphasized that the information collected will help it calibrate the prudential treatment of cryptoasset exposures, as well as analyze the potential costs and benefits of various policy options. The overarching aim is to enhance the Bank of England’s ability to assess and manage the financial stability implications of these assets.
The PRA's request is not only focused on current crypto exposures but also seeks to account for firms' plans regarding cryptocurrency activities through to September 30, 2029. This long-term view will provide regulators with a comprehensive understanding of the trajectory of crypto asset use within the UK financial system.
In the questionnaire, the PRA outlines several key areas of interest. One significant focus is the use of the Basel framework to manage and mitigate the risks associated with holding and transacting in crypto assets. Firms are also asked to address their use of permissionless blockchains—decentralized networks that allow for transactions without intermediaries, such as banks.
While permissionless blockchains offer potential benefits, such as increased transparency and reduced reliance on central authorities, they also pose unique risks. These include issues related to settlement finality, potential settlement failures, and the absence of guaranteed ownership links between the intended owner of an asset and the entity responsible for validating and securing the asset's ownership.
“While there are benefits that these new types of ledgers can bring, they also pose risks such as lack of settlement finality, settlement failure, and no guaranteed link between the intended owner of the asset and the entity that may have control of the authentication, validation mechanism,” the PRA noted in its statement. The regulator also mentioned that it currently cannot sufficiently mitigate the risks associated with permissionless blockchains, though this classification remains under review.
The PRA’s move comes as global interest in cryptoassets, particularly Bitcoin, continues to rise. A growing number of companies are adding Bitcoin and other cryptocurrencies to their balance sheets, hoping to capitalize on the asset class's potential for high returns. Just recently, several firms in Asia announced major investments in Bitcoin as part of their treasury management strategies.
For instance, Hong Kong-based Boyaa Interactive International, a card and board game company, disclosed on November 29 that it had swapped nearly $50 million worth of Ether (ETH) for Bitcoin. Similarly, Japan’s Metaplanet investment firm revealed plans to raise over $62 million to purchase more Bitcoin, building on its existing holdings of 1,142 BTC, worth over $114 million at current market prices.
These moves reflect the growing mainstream acceptance of cryptocurrencies, particularly Bitcoin, as a hedge against inflation and a store of value. However, as institutional involvement in the sector increases, regulators are keen to ensure that businesses are prepared to handle the risks and challenges associated with cryptoassets, which remain volatile and largely unregulated.
By gathering data on cryptoasset exposures, the PRA aims to better understand the sector’s impact on financial stability and develop an effective regulatory framework. This disclosure requirement marks an important step in ensuring that businesses are equipped to manage the risks associated with the growing crypto industry, while also helping regulators tailor policies that safeguard the financial system.
With the global landscape for cryptoassets continuing to evolve, the Bank of England's efforts to monitor and regulate the sector are likely to have significant implications for businesses and financial institutions in the UK and beyond. As companies increasingly integrate digital currencies into their operations, regulators will face an ongoing challenge to strike the right balance between fostering innovation and protecting market stability.
December 2024, Cryptoniteuae