On August 18, the Office of the Superintendent of Financial Institutions (OSFI) published an Advisory setting out its expectations for Federally Regulated Financial Institutions (FRFIs) that have exposure to cryptoassets - i.e. digital assets that depend primarily on cryptography and distributed ledger or similar technology.
OSFI’s interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures helps FRFIs in implementing a solid risk management framework.
Cryptoasset exposure is defined in the Advisory as : “direct exposures to cryptoassets, as well as any indirect exposures whose value or risk is substantially determined by the value of one or more cryptoassets. These indirect exposures include all instruments referencing cryptoassets, such as (but not limited to) derivatives, mutual funds, exchange traded funds (ETFs), units of trusts and partnerships, or shares in a corporation.”
OSFI also provides further guidance on how to approach the capital and liquidity treatment of cryptoasset holdings depending on their categorisation.
Group 1 consists of cryptoassets that meet all of the following criteria:
They are digital representations of traditional assets.
A legal opinion has been obtained that confirms that all rights, obligations and interests are clearly defined, legally enforceable, and are consistent with comparable traditional assets.
A legal opinion has been obtained confirming settlement finality of the cryptoasset.
All significant risks are accounted for using robust risk governance and control policies by entities performing the transfer, settlement or redeemability functions of the cryptoasset.
All entities that execute redemptions, transfers, storage or settlement finality, or manage or invest reserve assets, are regulated and supervised, or subject to appropriate risk management standards. In the case of stablecoins, the issuer must be prudentially regulated and subject to capital and liquidity requirements that are comparable to those of OSFI.
Group 2 consists of cryptoassets that fail to meet any of the Group 1 criteria.
The Advisory does not address the issue of whether FRFRs can issue, acquire or hold a controlling or substantial investment in entities engaged in crypto-related activities.
The Advisory complements several OSFI’s guidelines, including the following:: Capital Adequacy Requirements, Leverage Requirements, Liquidity Adequacy Requirements, Foreign Bank Branch Deposit Requirement (A-10) and Minimum Capital Test.
The Advisory will become effective in Q2 2023.