Canada's financial regulator proposes strict new guidance for crypto asset exposure

Canada's financial regulator proposed strict new guidelines for bank and insurance sector crypto-asset exposure. 

The Office of the Superintendent of Financial Institution's guidelines advise banks and insurers on capital and liquidity risks when dealing with crypto-assets. The OSFI said the new rules "reflect an evolving risk environment and international developments."

The regulatory guidelines come in two parts — one for banks, the other for insurers. "Today, OSFI announced two draft guidelines, one for federally regulated deposit-taking institutions and another for insurers, on the regulatory capital treatment of crypto-asset exposures," the regulator said.

Crypto exposure limits and risk weighting

The proposal said crypto-assets should be categorized into two broad groups — one category for tokenized traditional assets and stablecoins, and the other for unbacked crypto assets. The guidelines said banks should have an exposure limit of no more than 1% for unbacked crypto assets.

It gave an example of how banks should consider the risk weighting of tokenized and traditional assets. "A tokenized corporate bond held in the banking book will be subject to the same risk weight as the non-tokenized corporate bond held in the banking book," the guidelines state. However it underlines that "a tokenized asset may have different market liquidity characteristics than the traditional, non-tokenized, asset."

The speed with which creditors could take possession of crypto-asset collateral was addressed. Banks are advised to assess whether crypto-asset collateral can be liquidated in a way that meets legal certainty requirements. 

Update on Basel Committee standards

The OSFI said it drafted the detailed guidance on crypto-asset exposure as an update to proposals released by the Basel Committee on Banking Supervision in December 2022. “They have been updated to reflect the Canadian context and the industry for which the guideline has been developed, i.e. banking or insurance,” the OSFI wrote.

“The banking guideline reflects the December 2022 BCBS banking standard and the insurance guideline incorporate the relevant parts of the BCBS standard with adjustments to meet the specific context of the insurance industry," the report added.

After the OSFI consultation period ends on September 20, the guidelines will come into effect in Q1 of 2025.