Banks’ exposure to crypto should be limited: Canada

• Canada has proposed that banks should not have an exposure of more than 1% to unbacked digital assets.
• The consultation period concludes on 20 September.

The Canadian financial regulator has proposed new guidelines regarding crypto exposure in the banking and insurance sector.

The latest guidelines from the Office of the Superintendent of Financial Institution (OSFI) gave suggestions to financial institutions on capital and liquidity risks of exposure to crypto assets. OSFI stated that the latest guidelines,

“Reflect an evolving risk environment and international developments.”

The OSFI said that its guidelines on crypto exposure have been drafted in response to proposals released by the Basel Committee on Banking Supervision in December 2022.

The two draft guidelines include one for federally regulated banks and another for insurance companies.

The proposal said that digital assets should be classified into two broad groups: (i) tokenized traditional assets and stablecoins, and (ii) unbacked crypto assets. Moreover, banks should have an exposure limit of no more than 1% for unbacked crypto assets.

The guidelines mentioned,

“Banks should separately assess the tokenized traditional asset against these expectations, and not assume qualification for a given treatment simply because the traditional (non-tokenized) asset qualifies. For example, a tokenized asset may have different market liquidity characteristics than the traditional (non-tokenized) asset.”

It also addressed the rate at which creditors could take possession of a digital asset as collateral, albeit in a legal manner.

The OSFI consultation period concludes on 20 September. The authorities will implement these guidelines in the first quarter of 2025.

Measures to contain U.S.-like crypto explosions in March?

Canada isn’t the only major country concerned about the exposure of large financial institutions to digital assets.

The global crypto industry in the U.S. and the world at large witnessed huge turmoil in March due to the collapse of several banks with exposure to crypto assets.

The crypto-friendly Silicon Valley Bank (SVB) collapsed in March when its parent company began performing terribly on the stock market. Soon after, several crypto companies began withdrawing their funds from the bank.

Silvergate Bank, a major crypto-focused banking institution, also decided to cease operations and liquidate its assets around the same time. Within a few days, the New York authorities closed down crypto-friendly Signature Bank, which caused it to wind down its operations.