A news release by the Office of the Superintendent of Financial Institutions (OSFI) addressed the regulatory capital and liquidity treatment of crypto-asset exposures in Canada. In the release, the OSFI announced proposals for two new guidelines.
These guidelines take account of the risk of crypto asset exposures for financial institutions and insurers. They also take account of international developments concerning the regulation of digital assets. The OSFI proposals are currently drafts and are under consideration until September 20, 2023.
Why the rise of cryptocurrencies in Canada makes clarity necessary
Digital assets have been a source of excitement in Canada since the first Bitcoin ATM in the world was launched in Vancouver in 2013. Since this development, cryptocurrencies have continued to flourish in the country. Today, around four million Canadians own crypto assets. This figure seems set to increase. According to an Ontario Securities Commission (OSC), survey in October 2022, 31% of Canadians were thinking of buying crypto assets over the next twelve months.
The popularity of crypto has risen in Canada despite the fact that cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are not legal tender in the country. This is because Canadians may not be able to spend crypto, but they can trade in digital assets. Cryptocurrencies can also be used with Air Canada for travel and airline tickets, and with online casinos in Canada that accept crypto deposits. This type of crypto gambling has become more popular in Canada in recent years due to the anonymous nature of transactions, the lack of regulation, and the fact that casino operators pay lower fees on crypto deposits when compared with fiat currency deposit methods such as card payments.
This same lack of regulation presents risks to individuals and financial institutions during the trading of digital assets. Canadian residents use approved cryptocurrency exchanges together with a bank account that provides the service when trading.
Providing these services creates risk for financial institutions and for insurers in the industry. Hence the need for the OSFI proposed guidelines for institutions facing exposure to crypto assets.
New OSFI proposals clarify regulatory framework
Institutions in the crypto arena have long since sought clarity regarding the capital and liquidity approach to crypto assets. The recently announced OSFI proposals address this requirement. They include two sets of guidelines, one for federally regulated deposit-taking institutions and the other for insurers. The guidelines provide a clear line to take regarding the regulatory capital treatment of crypto-asset exposures.
The proposals from the OSFI follow the path taken internationally with the provision of standards by the Basel Committee on Banking Supervision in December 2022. The OSFI took these standards and adapted them for the Canadian crypto landscape. Both sets of guidelines created by the OSFI detail four categories of crypto assets and the capital treatment for each category.
There will be two different approaches available to institutions regarding capital and liquidity treatment, depending on their exposure to crypto assets. They can opt for a simplified or a comprehensive approach.
Once the consideration of the OSFI proposals is complete, the final decision regarding their implementation will be made. It’s likely this implementation will go ahead creating clarity in the area of crypto assets in Canada.