OSFI seeks consultation on crypto asset exposures treatment | Dentons

There was a fast enhance within the quantity and kinds of crypto belongings lately with the estimated market capitalization hitting all-time highs whereas attracting each institutional and retail buyers. Though the relative publicity of banks, insurers, belief corporations and different monetary establishments to crypto belongings just isn’t excessive at the moment, the dimensions of the crypto asset market itself and the dangers tied to market volatility justify additional evaluate. Recognizing this development, regulators across the globe are analyzing the dangers related to crypto belongings, which embody liquidity threat, credit score threat and Know-Your-Buyer/Anti-Cash-Laundering (AML/KYC) threat, and are looking for to ascertain the suitable frameworks to manage these belongings.

On July 5, 2021, the Workplace of the Superintendent of Monetary Establishments (OSFI) revealed a letter (Letter) to Federally Regulated Monetary Establishments (FRFIs) requesting their suggestions on the prudential remedy of crypto asset exposures, which we discover on this Perception.

The Basel Committee on Banking Supervision session paper

The Letter issued by OSFI follows the Basel Committee on Banking Supervision’s (BCBS)¹ session paper issued just one month earlier on June 10, 2021. BCBS is looking for suggestions on its preliminary proposal for the prudential remedy of banks’ publicity to crypto belongings and is proposing to categorise crypto belongings into two teams:

• Group 1: Tokenized conventional belongings and stablecoins that meet a sure set of situations, which embody that:

• The crypto asset represents a authorized declare in jurisdictions the place the underlying asset is issued
• Materials dangers of the crypto asset and the community on which it operates, together with the distributed ledger or related expertise, are mitigated
• Specified capabilities, similar to redemptions, transfers or settlement, are carried out by regulated entities

• Group 2: All different crypto belongings not captured by Group 1.

Group 2 crypto belongings are thought of larger threat and, in keeping with the BCBS, must be topic to a extra conservative prudential remedy in comparison with Group 1.

OSFI session

OSFI issued the Letter looking for feedback from the business based mostly on questions posed within the BCBS session paper in addition to particular FRFI-directed questions. OSFI has indicated it helps the event of a risk-sensitive prudential framework for crypto asset exposures and can depend on the suggestions acquired from FRFIs to tell the regulation of FRFIs on this house, and to make sure Canadian views are well-represented in worldwide discussions on the topic.

The session seeks suggestions from FRFIs on 18 questions raised by the BCBS session paper annexed to the Letter together with the next six questions to help OSFI in growing its personal framework:

1. How would the proposed capital remedy for crypto belongings within the BCBS session paper work together together with your present or contemplated enterprise fashions on this house?
2. Are there additional regulatory capital or different prudential views, past these contemplated within the BCBS paper, which OSFI ought to take into account in additional element with respect to oblique crypto asset exposures, similar to via crypto asset change traded funds (ETFs)?
3. Are there extra dangers from hedging a cash-settled publicity with a direct publicity (and vice versa) that must be thought of, similar to foundation, operational, or expertise dangers?
4. Are there extra concerns related to non-bank FRFIs that OSFI must be conscious of when growing a prudential framework for crypto belongings?
5. Are you able to establish any current crypto belongings that you simply consider ought to qualify for Group 1 remedy that don’t based mostly on the proposed classification situations? What modifications to the classification situations could be needed to permit these crypto belongings to qualify for Group 1 remedy?
6. For Group 2 crypto belongings, the BCBS session paper doesn’t present any recognition to the netting of lengthy and quick positions, whereas it notes there are extra dangers to speculative quick positions. Is that this a prudent capital remedy with acceptable incentives?

Suggestions from FRFIs on the six questions set out above together with the questions raised by the BCBS session paper annexed to the Letter might be submitted to OSFI at [email protected] till September 30, 2021. FRFIs are additionally inspired to submit comments on to the BCBS on its session paper by September 10, 2021.

Concluding ideas

With the numerous market progress of crypto belongings globally and ongoing worldwide consultations on how such belongings must be regulated, OSFI has introduced FRFIs with a novel alternative to have interaction in dialogue and assist form the regulatory framework for crypto belongings in Canada. Suggestions from the business can also be vital provided that the framework might affect OSFI’s capital tips. OSFI has revealed draft capital steerage for banks, insurers and belief corporations which is anticipated to take impact in January 2023. OSFI’s current and draft capital steerage doesn’t at the moment include categorical necessities or standards for crypto belongings. Given the diploma of market volatility related to crypto belongings and OSFI’s general prudential method, it’s potential that FRFIs could also be required to keep up a bigger “buffer” for crypto publicity than they might for publicity to different asset lessons.

FRFIs wishing to submit feedback ought to evaluate the Letter and the BCBS session paper in additional element and be cognizant of the upcoming autumn deadlines set out above.

1. The BCBS is a world commonplace setter for the prudential regulation of banks. Offering a discussion board for cooperation amongst central banks and financial institution supervisors, the BCBS seeks to strengthen the regulation, supervision and practices of banks worldwide with the intention to improve monetary stability. The BCBS doesn’t possess any formal supranational authority, however depends on its members’ commitments (45 members from 28 jurisdictions, which incorporates each the Financial institution of Canada and OSFI) with the intention to obtain its mandate.

A particular thanks to Jaspal Nagra (summer season scholar) for his help with this text.