- Canada’s finance regulator proposed capital requirements for crypto assets.
- The new capital regulations are largely focused on two sectors.
- The rules aim to reduce risk and promote transparency.
As regulation of cryptocurrencies intensifies on a global scale, Canada has looked to step up its efforts. In response to the growing scrutiny of the crypto space, Canada’s Office of the Superintendent of Financial Institutions (OSFI) has proposed new capital regulations for banks and insurers dealing with cryptocurrencies.
The proposed guidelines provide a streamlined, comprehensive approach, with provisions for an institution’s exposure to crypto-assets.
Crypto Asset Risk Management for Banks and Insurers
In terms of determining the management of credit, market, and liquidity risk, the way a bank treats its crypto-asset exposures depends on the prudential classification of crypto-assets. Per the OSFI, classification determinations require ongoing assessment, and crypto-assets should be divided into two groups.
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One of these groups is tokenized traditional assets and stablecoins, and the second is unsupported cryptocurrencies. Banks are required to have an exposure cap of no more than 1% for unsupported crypto assets.
The guideline provided an illustration of how banks should balance the risk of tokenized versus conventional assets. Under the proposed rules, a tokenized corporate bond kept in the banking book will be subject to the same risk weight as a non-tokenized corporate bond maintained in the banking book. However, the draft outlines exceptions to the stipulations, stating:
"A tokenized asset may have different market liquidity characteristics than the traditional, non-tokenized, asset."
OSFI Aligns with Basel Committee Suggestions
The specifics for guidelines on crypto-asset exposure were drafted as an update to suggestions made by the Basel Committee on Banking Supervision in December 2022.
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“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 incorporates the relevant parts of the BCBS standard with adjustments to meet the specific context of the insurance industry,” the report added.
The recommendations will go into effect in the first quarter of 2025, following the conclusion of discussions on September 20, 2023.
On the Flipside
- Binance, the world’s biggest cryptocurrency exchange by trading volume, exited the Canadian market in May owing to tougher laws in the nation.
- In the initial months of 2023, Canadian regulators urged crypto exchanges to register or shut down.
Why This Matters
The OSFI’s proposed recommendations aim to correspond with global norms while also considering the unique needs of the local insurance market. As the discussion continues through September 20, the crypto industry in Canada and elsewhere will observe developments, hoping for clear laws and a balanced approach that encourages innovation while successfully controlling risks.
To learn more about Binance’s exit from Canada, click here:
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