Crypto-asset exposures: The Office of the Superintendent of Financial Institutions proposes its guidelines to federally regulated deposit taking institutions and insurers

On July 26, 2023, the Office of the Superintendent of Financial Institutions (OSFI) issued a news release proposing two new guidelines that would change the Canadian regulatory capital and liquidity treatment of crypto-asset exposures to account for the risk and international developments concerning these digital assets. OSFI is inviting interested members of the public to comment on these guidelines, which are currently only drafts under consideration, until September 20, 2023.¹ 

OSFI guidelines

The guidelines proposed by OSFI take place as federally regulated deposit taking institutions and insurers (collectively, the Financial Institutions) are seeking clarifications on the regulatory framework that applies specifically to crypto-asset exposures in relation to capital and liquidity treatment in the Canadian context. 

OSFI’s proposed clarification reflects the provisions of the standards published in December 2022 by the Basel Committee on Banking Supervision, to follow the international trend in the classification and processing of crypto-assets by financial institutions, taking into account the specific risk arising from exposure to them.² Adapting these standards to the Canadian reality, OSFI is proposing two guidelines: (i) one applying to federally regulated deposit taking institutions³ and (ii) the other applying to insurers.⁴  

Both guidelines detail four categories of crypto-assets and the capital treatment for each. According to OSFI’s proposals, Financial Institutions will have the choice between two different approaches for capital and liquidity treatment depending on the extent of their exposure to crypto-assets. Financial Institutions will have to choose between a simplified approach and a comprehensive approach. 

Simplified approach or comprehensive approach?

The simplified approach provides a simpler and more flexible capital and liquidity treatment framework for Financial Institutions with limited exposure to crypto-assets or those wishing to simplify the crypto-asset categorization system established by the comprehensive approach. OSFI sets out the conditions for classifying crypto-assets in the Annex to the guidelines and suggests four categories of crypto-assets:

• Group 1A: Tokenized traditional assets that meet the classification conditions set out. 
• Group 1B: Crypto-assets with effective stabilization mechanisms that meet the classification conditions, for example, stablecoins.
• Group 2A: Crypto-assets, including tokenized traditional assets, stablecoins and unbacked crypto-assets that fail to meet the classification conditions.
• Group 2B: All other crypto-assets that fail to meet the classification conditions.

This categorization aims to cover the entire range of crypto-assets on the market, but does not include central bank digital currencies or any other digital money or assets. The comprehensive approach requires that each Financial Institution classify its crypto-asset exposures into one of the four categories and apply the particular standards related. For each of the above categories, OSFI prescribes specific capital and liquidity treatment. For its part, the simplified approach requires Financial Institutions to treat all their crypto-asset exposures in a uniform and pre-determined manner, regardless of their category, i.e., as exposures to Group 2 for insurers and Group 2B for federally regulated deposit taking institutions.

The future of crypto-assets in Canada

Regardless of the approach chosen, Financial Institutions will need to consider and adapt to the overall risk of exposure to crypto-assets, including credit valuation adjustments, counterparty credit risk, operational risk, leverage, and the risk of large crypto-asset exposures. 

These guidelines provide Financial Institutions with a better overview of capital and liquidity treatment for crypto-asset exposures in Canada. More specifically, they provide Financial Institutions with a framework that is clearer and easier to navigate risk management and preserving available liquid capital, among other things. In any event, OSFI’s clarification on crypto-asset exposures should allow Financial Institutions to more formally integrate traditional finance with decentralized finance, with an increase in the offering of crypto-asset products to personal and institutional clients. 

Finally, it is important to note that OSFI’s August 2022 Advisory on interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures⁵ remains in effect. OSFI expects that the final version of the guidelines replacing the Advisory will come into effect in 2025.