Canada Introduces Crypto Exposure Guidelines for Banking and Insurance Sectors

Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), has introduced stringent new guidelines aimed at managing crypto-asset exposure in the banking and insurance sectors. The move comes as part of OSFI’s commitment to adapt to an evolving risk environment and align with international developments in the crypto space.

The proposed regulatory guidelines are divided into two parts – one tailored for banks and the other for insurers. OSFI announced the release of two draft guidelines, one for federally regulated deposit-taking institutions and the other for insurers, providing crucial insights into the capital and liquidity risks associated with crypto-assets.

The guidelines categorize crypto-assets into two broad groups: one for tokenized traditional assets and stablecoins, and the other for unbacked crypto assets. To mitigate risks, the proposal recommends that banks limit their exposure to unbacked crypto assets to no more than 1%.

In an effort to clarify the risk weighting of tokenized and traditional assets, the guidelines underscore that a tokenized corporate bond held in the banking book should carry the same risk weight as its non-tokenized counterpart. However, they caution that tokenized assets may exhibit different market liquidity characteristics compared to traditional assets.

Addressing the issue of collateral possession, the guidelines advise banks to assess whether crypto-asset collateral can be liquidated in a manner that meets legal certainty requirements.

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The OSFI’s comprehensive guidance on crypto-asset exposure aligns with the proposals released by the Basel Committee on Banking Supervision in December 2022. However, these guidelines have been tailored to reflect the Canadian context and the specific requirements of the banking and insurance industries.

The consultation period for the two draft guidelines will conclude on September 20, 2023. Upon completion of the consultation process, the guidelines are expected to be implemented in the first quarter of 2025.