OSFI sets capital rules for crypto

Federal financial regulator the Office of the Superintendent of Financial Institutions (OSFI) unveiled its approach to cryptoassets held by banks and insurers.

In an advisory, OSFI sets out its interim approach to the regulatory capital and liquidity treatment of cryptoasset exposures, “which aims to ensure that federally regulated financial institutions apply a conservative treatment and set prudent limits in relation to their cryptoasset exposures,” it noted in a letter to the industry.

The regulator said it expects that firms adopt a “cautious approach” to using crypto, and to “remain vigilant regarding the risks involved.”

The interim approach sets out OSFI’s treatment of credit risk, market risk and leverage involving crypto.

The guidance distinguishes between so-called group 1 and group 2 cryptoassets, with group 1 including digital representations of traditional assets that also meet a variety of other criteria involving their legal status, governance and custody arrangements (among other things).

Group 2 crypto is defined as all other digital assets that don’t meet the definition of group 1 assets.

In terms of credit risk, OSFI’s approach treats group 1 assets like traditional assets, whereas exposures to group 2 assets in banking books must be deducted from banks’ core capital, and group 2 assets have no collateral value under OSFI’s approach.

Short positions on group 2 crypto are not allowed, as these holdings have unlimited risk, it noted.

OSFI said its interim approach to crypto builds on a position it originally set out in July 2021, and sets limits on banks’ and insurers’ crypto dealings.

“This interim approach helps ensure that [financial firms] adopt sound risk management policies and practices concerning their cryptoasset holdings, helping to safeguard the resiliency and stability of the Canadian financial system,” OSFI noted.

The regulator said it intends to update this guidance as government policy evolves, and global regulatory approaches to crypto are crystallized.

“Like other financial institutions around the world, some Canadian [financial institutions] have exposures to cryptoassets, and we have provided this interim approach to help ensure risks in this area are managed prudently and supervised according to the principle of ‘same activity, same risk, same regulation,’” said OSFI superintendent, Peter Routledge, in a release.

Additionally, the regulator sought feedback on several consultation questions that will be used to update the guidance. The deadline for providing feedback is Oct. 14.

The Basel Committee on Banking Supervision is also currently in the midst of an ongoing consultation on the prudential treatment of crypto exposures. The deadline for providing feedback to that consultation is Sept. 30.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.