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PRA Dear CEO: Exposure to Cryptoassets

2nd July 2018

PRA follows FCA footsteps

Last week we wrote about the FCA’s Dear CEO letter to Banks on 11th June in relation to so called ‘crypto’ currencies and their potential to pose a higher financial crime threat. Following on from this, the PRA have since issued their own Dear CEO letter also in relation to cryptocurrencies.

Sent out on the 28th June, the PRA’s letter relates to a Firm’s existing or planned exposure to crypto-assets.

The PRA writes, “In their short history, crypto-assets have exhibited high price volatility and relative illiquidity. Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks.”

As such, firms are reminded that “entering into activity related to crypto-assets may also give also rise to reputational risks.”

Cryptoassets & Risk Mitigation

The PRA  go on to suggest three risk management strategies and systems they would consider most appropriate to cryptoassets, these being:

1. Recognition by firms that crypto-assets represent a new, evolving asset class with risks which should be considered fully by the board and highest levels of executive management. In particular, an individual that has been approved to perform an appropriate Senior Management Function (SMF) should be involved actively in reviewing and signing off on the risk assessment framework for any planned business direct exposure to crypto-assets and/or entities heavily exposed to crypto-assets;
2. Firm’s should ensure that their remuneration policies and practices and the incentives provided for engaging in this actvity do not encourage excessive risk-taking;
3. Finally that firms should ensure that their risk management approach is commensurate to the risks of cryptoassets.

Cryptoassets & ICAAP

The PRA additionally reminds Firms that, where relevant, they should set out their consideration of risks relating to crypto-exposures in their

Internal Capital Adequacy Assessment Process (ICAAP) which should include:

• discussion of the major drivers of risk;
• sensitivity analysis to assess how changes in risk drivers might affect valuations and projections and affect the firm’s capital/solvency ratios; and
• an assessment of risk mitigants and what capital should be held against this risk.

Regulatory Help & Support

If you are considering the effectiveness of your current approach to cryptoassets, your regulatory requirements or have a practical compliance challenge that you would like support or advice upon, we would be delighted to hear from you. Just drop an email to our regulatory support team.

Related Reading:

• FCA Dear CEO: Cryptocurrencies & Financial Crime
• Cryptocurrency in Regulatory Focus

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