RWA Tokenization for banks is dead
Based on the Consultative Document of the Basel Committee on Banking Supervision (BCBS), the tokenization of securities or other assets on permissionless blockchains is dead.
Background: The BCBS has issued standards for capital requirements that banks must comply with when dealing with crypto assets. In simplified terms, this concerns crypto assets, i.e., Bitcoin, stablecoins, i.e., Thether, and tokenized traditional assets, i.e., bonds, stocks, etc., divided into two categories. If an asset falls under Group 1, the capital requirements generally based on the existing Basel framework apply. If an asset falls into Group 2, 100% or even 1250% capital charges are required, depending on further subcategorization.
BCBS Statement December 14th: In its latest paper, BCBS outlines that it has completed its review and concluded that the “use of permissionless blockchains gives rise to a number of unique risks, some of which cannot be sufficiently mitigated at present.” Above all, it emphasizes that banks are dependent on third parties to carry out basic operations when using permissionless blockchains. Also, the lack of or limited due diligence and monitoring capabilities by banks (e.g., in the area of AML/CFT) are highlighted.
The BCBS concludes that the Committee “does not propose any adjustments to the cryptoasset standard to allow for the inclusion of cryptoassets that use permissionless blockchains in Group 1.”
Consequence: The costs of holding tokenized securities, RWAs, or even stablecoins issued on permissionless blockchains are prohibitively high for financial institutions, as they require a capital charge of at least 100%. Only assets tokenized on permissioned blockchains could fall under Group 1 and thus be subject to the same rules as their traditional counterparts.
Personal assessment: In light of the steadily increasing legal certainty in tokenized securities, I cannot follow BCBS’s assessment in some aspects. For example, a regulatory regime has been created in Germany to address the risks mentioned above by establishing a liable counterparty as a so-called crypto securities registrar. To obtain this corresponding license from Bafin, many requirements must be met, including business continuity processes, backup procedures, basic off-chain storage of data, etc.
On the other hand, the BCBS’s assessment of AML/CFT risks cannot be rejected, as such activities can generally occur on a permissionless infrastructure. In addition, it is currently impossible to prevent sanctioned parties from participating in a permissionless network and being rewarded accordingly for validating transactions. However, these problems are inherent to the system and are not solved by a high capital charge per se.
Today’s financial world is also struggling with AML/CFT risks. Financial institutions must, therefore, implement specific processes and comply with regulations to minimize them. Even today, these cannot be prevented entirely. The criteria defined by the BCBS mean a fundamental disadvantage of new technology compared to the imperfect system currently in use and, therefore, cannot be a solution if innovation is to be promoted.
In this context, blockchain should be viewed more as an infrastructure than an application. The internet is also used with bad intentions, and the behavior of third parties cannot be fully controlled. Here, we try to reduce harmful behavior at the application level. However, we do not make the cost of using the infrastructure prohibitively high.
Authors
Benjamin Schaub is a managing partner at intas.tech, a consulting firm specializing in strategically assessing blockchain use cases and integrating digital assets into existing business models and IT infrastructures. Before joining intas.tech, he worked as a project manager for the Frankfurt School Blockchain Center, with a research focus on blockchain infrastructures and crypto custody. He is also a co-author of several blockchain studies.(www.linkedin.com/in/benjamin-schaub).
About intas.tech
intas.tech is a strategy consulting firm for focusing on the strategic assessment of blockchain use cases as well as the integration of digital assets into existing business models and IT infrastructures. The unique combination of blockchain know-how and in-depth expertise in the regulatory environment enables holistic, cross-industry consulting approach.
