OSFI Consultation on Prudential Treatment of Cryptoasset Exposures

On June 10, 2021, the Basel Committee on Banking Supervision (the “Basel Committee”) released a public consultation paper on the prudential treatment of cryptoasset exposures (the “Report”), which we previously discussed in a separate blog post. In the Report, the Basel Committee proposed a framework for the prudential treatment of cryptoassets and requested feedback on the proposal.

On July 5, 2021, the Office of the Superintendent of Financial Institutions (“OSFI”) published a letter (the “Letter”) highlighting the Report to Canadian federally regulated financial institutions (“FRFIs”) and requesting feedback from FRFIs on the consultation questions raised in the Report and additional related questions. Comments on the Letter are due to OSFI September 30, 2021. In addition, OSFI also encouraged Canadian FRFIs to provide comments directly to the Basel Committee on the Report, which are due September 10, 2021.

In brief, the Report proposes that cryptoassets be classified into groups 1 and 2. Group 1 cryptoassets must meet a series of conditions intended to identify “stablecoins” and tokenised traditional cryptoassets. Group 2 is a residual category that captures all cryptoassets not in Group 1 (including bitcoin). Assets in Group 1 would be subject to less conservative minimum risk-based capital requirements than Group 2 assets (which would be subject to a 1250% risk weighting). The Report also provided guidance for banks and supervisors on mitigating cryptoasset-specific risks.

OSFI is now considering how to structure its own prudential regulation framework for cryptoassets, and accordingly, requests feedback from FRFIs on the consultation questions highlighted in the Report and the following additional questions noted in the Letter:

  1. How would the proposed capital treatment for crypto assets in the Report interact with the FRFI’s current or contemplated business models in this space?
  2. Are there further regulatory capital or other prudential perspectives, beyond those contemplated in the Report, which OSFI should consider in more detail with respect to indirect crypto asset exposures, such as through crypto asset Exchange Traded Funds (ETFs)?
  3. Are there additional risks from hedging a cash-settled exposure with a direct exposure (and vice versa) that should be considered, such as basis, operational, or technology risks?
  4. Are there additional considerations relevant to non-bank FRFIs that OSFI should be mindful of when developing a prudential framework for crypto assets?
  5. Can the FRFI identify any existing crypto assets that it believes should qualify for Group 1 treatment that do not based on the proposed classification conditions? What modifications to the classification conditions would be necessary to allow these crypto assets to qualify for Group 1 treatment?
  6. For Group 2 crypto assets, the Report does not provide any recognition to the netting of long and short positions, while it notes there are additional risks to speculative short positions. Is this a prudent capital treatment with appropriate incentives?

FRFIs intending to engage in cryptoasset activities should review and consider the Report and the Letter and provide commentary to OSFI and the Basel Committee within the timelines noted above.

For more information about our firm’s Fintech expertise, please see our Fintech group’s page.

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