Prudential treatment of crypto asset exposures

​Document Properties

  • Type of Publication: Letter
  • Date: July 5, 2021
  • To: Federally Regulated Financial Institutions

Over the past few years, globally, we have been witness to significant growth in crypto assets. Recognizing this, regulators around the world have begun analyzing the associated risks and considering whether adjustments are needed to prudential frameworks for crypto asset exposures. Through this letter, OSFI aims to raise awareness of international consultations on the prudential treatment of crypto assets, and seek views from all Federally Regulated Financial Institutions (FRFIs).

Notably, on June 10, 2021, the Basel Committee on Banking Supervision (BCBS) issued a consultation paper that proposes a differentiated prudential treatment that categorizes crypto assets into two groups based on classification conditions, including that:

  • the crypto asset represents a legal claim on an underlying asset,
  • material risks of the crypto asset and the network on which it operates are mitigated, and
  • specified functions are performed by prudentially regulated entities.

Group 1 crypto assets are those that meet all of the classification conditions. They would broadly be eligible for the prudential treatment of the underlying reference asset. All others are considered Group 2 crypto assets and would receive a more conservative prudential treatment.

While this consultation is originating with the BCBS, OSFI is concurrently beginning to consider an appropriate prudential framework for crypto assets, with potential implications for all capital guidelines. We are therefore inviting views from all FRFIs on this consultation paper.

OSFI supports the work towards identifying an appropriate and risk-sensitive prudential framework for crypto asset exposures. In order to ensure Canadian perspectives are well represented in international discussions and to help inform its future work in this area for the institutions it regulates, OSFI is seeking feedback both on the BCBS questions listed in the attached Annex and on the following questions:

  1. How would the proposed capital treatment for crypto assets in the BCBS consultation paper interact with your current or contemplated business models in this space?
  2. Are there further regulatory capital or other prudential perspectives, beyond those contemplated in the BCBS paper, 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 you identify any existing crypto assets that you believe 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 BCBS consultation paper 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?

Request for Feedback

Feedback from domestic institutions on the questions listed above and those in the Annex should be sent to OSFI by email at by no later than September 30, 2021.

We also encourage institutions to provide comments directly to the BCBS on its consultation paper. Comments may be submitted at by September 10, 2021.

Annex - List of questions included in the BCBS’s Consultation Paper

  1. What are your views on the Committee’s general principles? (Page 3)

  2. What are your views on the Committee’s approach to classify crypto assets through a set of classification conditions? Do you think these conditions and the resulting categories of crypto assets (Group 1a, 1b and 2) are appropriate? Which existing crypto assets would likely meet the Group 1 classification conditions? (Page 6)

  3. What are your views on the classification conditions? Are there any elements of these conditions that should be added, clarified or removed in order to: − ensure full transferability, settlement finality, and/or redeem-ability; − limit regulatory arbitrage, cliff effects and market fragmentation; and − take account of new and emerging crypto assets? (Page 6)

  4. For the first classification condition, is there an alternative methodology to assess the effectiveness of the stabilisation mechanism of Group 1b crypto assets? Would this proposed methodology be consistent with ensuring the effectiveness of the stabilisation mechanism while also being practical? (Page 6)

  5. For the third classification condition, (i) would risk governance and risk control practices for Group 1 and Group 2 crypto assets differ; and (ii) are there alternatives to the required risk governance and risk control practices that would ensure that material risks of the network are sufficiently mitigated and managed? (Page 6)

  6. For the fourth classification condition, (i) to what extent would the regulation and supervision of entities that execute redemptions, transfers, or settlement finality of the crypto asset reduce risk in crypto asset exposures held by banks; (ii) which entities should/ should not be in scope of regulation or supervision? For instance, are there entities involved in the transfer and settlement systems of crypto assets (such as nodes, operators and/or validators) that should be excluded from the condition of required regulation and supervision? (Page 6)

  7. Do you consider the responsibilities of banks and supervisors to be clear and appropriate? Are there any other responsibilities for banks or supervisors that the Committee should consider? (Page 7)

  8. Are there ways in which the increased operational risk relating to crypto assets (relative to traditional assets) can be measured? How should a pillar 1 add-on be designed to capture additional operational risks arising from exposures to crypto assets? (Page 7)

  9. Are there further aspects of the credit risk and market risk requirements that could benefit from additional guidance on how they should apply to Group 1a crypto assets? (Page 9)

  10. Do you have any views on the Committee’s current thinking on the capital requirements for Group 1b crypto assets? (Page 13)

  11. What further aspects of the credit risk and market risk requirements could benefit from additional guidance on how they should apply to Group 1b crypto assets? (Page 13)

  12. Do you think the proposed capital treatment of Group 2 crypto assets, including the application of a 1250% risk weight instead of deducting the asset from capital (for the reasons explained above), appropriately reflects the unique risks inherent in these assets? (Page 15)

  13. Are there alternative approaches that the Committee should consider that are simple, conservative and easy to implement? For exposures in the trading book, would it be appropriate to permit recognition of hedging via the application of a modified version of the standardised approach to market risk? (Page 15)

  14. Do you have any views on the Committee’s current thinking regarding the leverage ratio, large exposures framework and liquidity ratio requirements? Are there further aspects of these requirements that could benefit from additional guidance? (Page 16)

  15. Do you have any views on the responsibilities of banks? Are there any other responsibilities or aspects that should be covered by banks for the purposes of the supervisory review? (Page 17)

  16. Do you have any views on the responsibilities of supervisors? Are there any other responses that could be considered by supervisors when conducting supervisory review? (Page 18)

  17. Do you have any views on the adjustments to minimum Pillar 1 capital requirements to capture additional credit and/or market risk? Are there any other potential modifications that supervisors may need to consider? (Page 18)

  18. Do you have any views on the potential design of disclosure requirements? (Page 19)