SIFMA: repo-on-DLT use cases in the context of a Basel infrastructure risk add-on

The Basel Committee has proposed an “infrastructure risk add-on” for Group 1 cryptoassets to capture “unforeseen risks” arising from the use of distributed ledger technologies (DLT). Any potential risks arising from novel features associated with Group 1 crypto assets will eventually be captured through existing mechanisms for controlling and mitigating financial and non-financial risks.

As a result, the Basel Committee should not apply a blanket infrastructure risk add-on for Group 1 cryptoassets. Otherwise, the infrastructure risk add-on will act as a strong disincentive for responsible financial innovation, with prudentially regulated institutions being deterred from meeting increased institutional clients’ demand for Group 1 cryptoassets products/services. In addition, it would effectively make all DLT deployments uneconomic compared to other tech deployments.

In an article, the Securities Industry and Financial Markets Association (SIFMA) details the “infrastructure risk add-on” and why Basel should not apply it, also using three use cases to demonstrate that these potential risks are captured by the established prudential capital requirements and mitigated by prudential regulation and supervision respectively. Those use cases are: JPM Coin System – a permissioned private blockchain system for recording deposit account balances and making instant payments; intraday repo – a permissioned tokenized traditional asset in a private blockchain; and EIB Digital Bond – a permissioned tokenized traditional asset in a public blockchain.

SIFMA writes: “DLT will be crucial to the ongoing capital market and financial system innovations, particularly in the areas of securities tokenization and increased processing automation. It is vital that prudentially regulated institutions remain central to innovation in this area in order for their benefits to be fully realized by a broad range of market participants and end-users.”

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