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New Interim Rules in Canada Regulate Crypto Exposure of Banks

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In accordance with the new interim guidelines issued by the Canadian government’s financial authority, financial institutions, including banks and insurers, can only risk a negligible portion of their capital on cryptocurrency and other crypto assets.

The Office of the Superintendent of Financial Institutions has stated that financial institutions are obligated to tell them if their gross exposure to type 2 crypto assets, which, by the regulator’s definition, would include the vast majority of cryptocurrencies, exceeds 1% of their Tier 1 capital.

Also, if a company has net short positions on certain assets greater than 0.1% of Tier 1 capital, such must report it to OSFI. The newly promulgated regulations will become operational in the second quarter of 2023.

Temporary Rules Ensuring Proper Handling of Virtual Currency

Due to the fact that cryptocurrencies are currently utterly unregulated in Canada, the interim guidelines constitute the first notable framework for how financial institutions in the country should approach cryptocurrencies.

The OSFI has stated that it will revise its approach in light of future events, such as a statutory review of the subject by the government, recommendations from the Basel Committee on Banking Supervision, and changes in the cryptocurrency market.

According to a statement released by Superintendent Peter Routledge, this temporary solution aims to promote rational risk management and management consistent with the premise of “same activity, same risk, same regulation” in the region.

The interim rules represent the first significant framework for how Canadian financial institutions should treat cryptocurrencies.

Large established financial institutions throughout the world have been unable to directly trade or maintain crypto assets on their balance sheets due to regulatory uncertainty. Before engaging in crypto-related operations, the Federal Reserve has required banks to provide advance notice. The standards for crypto capital, however, were not specified.

Under the newly revised guidelines, crypto assets of type 1 that represent a legal claim on an underlying asset and have additional protections in place are eligible to receive credit-risk capital treatment and liquidity treatment that is consistent with that applied to equivalent traditional assets. In other words, they can be treated in an analogous manner to how conventional assets of the same type are treated.

 

 

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