Cover Letter – Interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures

Accompanying Documents

Document Properties

  • Publication Type: Letter
  • Category: Capital, Liquidity, Leverage
  • Date: August 18, 2022
  • Audiences: Banks, T&L, FBBs, L&Fs, and P&C

OSFI is issuing the attached advisory, Interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures, which aims to ensure that federally regulated financial institutions (FRFIs) apply a conservative treatment and set prudent limits in relation to their cryptoasset exposures.

This interim guidance follows OSFI’s consultative letter dated July 5, 2021 and is effective at the beginning of a FRFI’s fiscal Q2 2023 reporting period, with earlier adoption encouraged. Through this interim arrangement, OSFI expects that FRFIs adopt a cautious approach to using cryptoassets and remain vigilant regarding the risks involved. Questions related to these interim arrangements should be sent to Kora Duch at Kora.Duch@osfi-bsif.gc.ca.

In addition, consultation questions have been included in the Annex to this letter to inform future updates to this guidance. Feedback should be sent to OSFI by email at Consultations@osfi-bsif.gc.ca by October 14, 2022.

On June 30, 2022, the Basel Committee on Banking Supervision (BCBS) issued a second consultation paper (https://www.bis.org/bcbs/publ/d533.htm) on the prudential treatment of cryptoasset exposures. OSFI encourages all FRFIs to provide comments directly to the BCBS at https://www.bis.org/bcbs/commentupload.htm by the comment deadline of September 30, 2022.

OSFI is committed to updating these interim arrangements as needed to reflect ongoing developments in four key areas: the Department of Finance legislative review focused on the digitalization of money and maintaining financial sector stability and security; a review of the domestic consultative feedback received on the Annex questions; the release of the BCBS’s final guidance on the prudential treatment of cryptoasset exposures; and, finally, ongoing developments in the cryptoasset market.

Annex

Consultation questions

To help inform future updates to the advisory, OSFI is seeking feedback on the following questions:

  1. The advisory states that an indirect cryptoasset exposure is any exposure “whose value or risk is substantially determined by the value of one or more cryptoassets. These indirect exposures include, but are not limited to derivatives referencing cryptoassets, mutual funds, exchange-trade funds (ETFs), units of trusts and partnerships, or shares in a corporation.” It also may include exposures to entities, such as crypto miners and infrastructure providers whose revenues or profits are substantially determined by the value of cryptoassets. Do the risk characteristics of these latter exposures warrant additional consideration for the next iteration of the advisory?
  2. In paragraph 60.57 of the June 2022 BCBS consultation paper, a 2.5% risk-weight add-on for infrastructure risk (i.e. 0.2% market risk capital charge) is applied to Group 1 cryptoassets.
    1. Are there market-based measures that could help identify the magnitude of these infrastructure risks?
    2. Is such a charge appropriate for Group 1 cryptoasset exposures?
    3. Should similar charges apply to the cryptoasset liabilities of FRFIs (e.g., for risks that arise from the issuance of cryptoassets)?
  3. One of the criteria in OSFI’s advisory for Group 1 inclusion (criterion #3) is a legal opinion confirming settlement finality. This criterion may exclude cryptoassets that rely on probabilistic settlement mechanisms, a common feature of permissionless proof of work blockchains. Are there alternative criteria that could be used to achieve a similar risk mitigation benefit but that may be less exclusory?
  4. Criterion #5 related to Group 1 cryptoassets in OSFI’s advisory requires key roles to be subject to regulation.
    1. Should this criterion be closely aligned with criterion #4 from the BCBS consultation paper (paragraphs 60.23-60.24)? Why or why not?
    2. How should the basis and redemption risks identified in paragraph 60.12 of the BCBS consultation paper be addressed?
    3. What are your views on the alternative proposal presented in paragraph 60.17 of the BCBS consultation paper?
  5. Are there criteria that could help identify stablecoins that would warrant a differential capital treatment, including criteria to address counterparty and liquidity risks, as well as reasonable disclosure requirements?
  6. The advisory provides no recognition (i.e., a 100% haircut) for Group 2 cryptoassets held as collateral, which is consistent with the capital treatment for unhedged positions in the trading book for deposit-taking institutions (DTIs). Are there hedging practices that appropriately mitigate the volatility of the collateral and could warrant a lower haircut?
  7. OSFI’s advisory includes a gross exposure threshold of 1% of Tier 1 capital (for DTIs and life insurers) or of capital available (for property and casualty, and mortgage insurers). This is comparable to the limit on Group 2 exposures proposed by the BCBS described on page 6 its June 2022 consultative document. In your view, what are the pros and cons of these two approaches?
  8. OSFI’s advisory requires insurance companies to deduct the full notional amount of any derivative referencing a cryptoasset.
    1. Should OSFI consider incorporating the calculation of an exposure amount under the current exposure method for derivatives referencing cryptoassets?
    2. Should said deduction also fully apply to derivatives referencing a portfolio with only partial cryptoasset exposure (e.g., 25% cryptoasset and 75% other assets)?
  9. Are there aspects that OSFI should keep in mind with respect to cryptoasset exposures with embedded derivatives when considering the next iteration of the advisory?
  10. Are there any other elements that OSFI should consider for the next iteration of this this advisory?
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