Representations of the Ripple, Bitcoin, Etherum and Litecoin virtual currencies are seen on a PC motherboard in this illustration picture, February 14, 2018.
Representations of the Ripple, Bitcoin, Etherum and Litecoin virtual currencies are seen on a PC motherboard in this illustration picture, February 14, 2018. Reuters / DADO RUVIC

Banks should take a conservative approach to setting aside capital to cover risks from "unbacked" crypto assets on their books, the global Basel Committee of banking regulators said in proposals on Thursday which now also cover blockchain.

Cryptoassets have tumbled in value in recent weeks partly triggered by the collapse of terraUSD, a stablecoin whose value was derived by complex algorithmic processes.

As a result, regulators like the Basel Committee are worried about the potential risks to the financial system from the lightly regulated crypto sector even though it is still small relative to the size of global stock, bond and derivatives markets.

The proposals on Thursday mark Basel's second public consultation on cryptocurrencies, which would require banks to take a conservative stance when setting aside capital for crypto holdings.

The Committee's proposal said cryptoassets which are not backed by assets like traditional currencies, and stablecoins that do not have effective stabilisation mechanisms, should continue to be subject to a conservative prudential treatment with regard to capital set aside for potential losses.

It also proposed a new limit on gross exposures to such cryptoassets.

In June last year, Basel had published a first consultation on the crypto sector, which proposed that banks must hold enough capital to cover losses on any bitcoin holdings in full.

Basel said it was keeping the basic structure of that first proposal, which divided cryptoassets two broad groups, one including stablecoins, and the other higher risk cryptoassets, which would require the more conservative capital treatment.

The latest Basel proposals include new elements such as extra capital to cover "evolving risks" from distributed ledger technologies or blockchain, which underpins cryptoassets.

The committee said it will continue to monitor market developments to see if the proposals need toughening further.

The committee, made up of banking regulators from the world's main financial centres, said it plans to finalise the rules by year-end.