Canada’s financial regulator wants banks to limit digital currency exposure to 2%

Canada’s financial regulator has published new guidelines for banks and insurers dealing with digital assets, including a maximum 2% exposure limit.

The Office of the Superintendent of Financial Institution (OSFI) ‘s guidelines advise financial institutions on the regulatory capital and liquidity treatment when handling digital assets. It says the guidelines are its response to new international banking standards and a risky digital currency environment.

In particular, the OSFI is basing its guidelines on the standards issued by the Basel Committee on Banking Supervision last December.

“In response [to those standards], OSFI has taken the opportunity to draft this more detailed guidance for Canada,” it said.

The new guidelines have imposed an exposure limit for banks and other federally regulated deposit-taking institutions.

“A bank’s total gross exposure to Group 2 [or the unbacked] crypto assets should not generally be higher than 1% of the bank’s Tier 1 capital and must not exceed 2% of the bank’s Tier 1 capital. ,” the watchdog stated. “Banks must notify OSFI should net short positions approach 1% of Tier 1 capital.”

They will have more leeway when dealing with fully backed stablecoins and tokenized traditional assets. However, the latter must be held to the same standards as existing products with similar risks.

A tokenized corporate bond held in the banking book, for instance, “will be subject to the same risk weight as the non-tokenized corporate bond held in the banking book.” This regulatory principle assumes that the two pose a similar risk of credit losses if exposed to the same conditions.

“Deposit-taking institutions and insurers need clarity on how to treat crypto-asset exposures when it comes to capital and liquidity. We look forward to giving them this clarity through these new guidelines that reflect industry input and international standards,” Peter Routledge, superintendent of financial institutions, commented.

Canadians have until September 20 to submit their feedback. The guidelines are expected to take effect in early 2025. The OSFI pledged to keep on updating its guidance as market conditions evolve.

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