PrefBlog

OSFI has announced Interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures:

Cryptoassets are broadly categorized into two groups – Group 1 and Group 2. Group 1 cryptoassets are those that meet the following set of criteriaFootnote3:

They are digital representations of traditional assetsFootnote4 using cryptography, distributed ledger technology or similar technology to record ownership.
A legal opinion has been obtained confirming that all rights, obligations and interests arising from the cryptoasset are: clearly defined, legally enforceable in all relevant jurisdictions, and consistent with the rights, obligations, and interests associated with comparable traditional assets.
A legal opinion has been obtained confirming settlement finality of the cryptoasset.
All entities performing transfer, settlement or redeemability functions of the cryptoasset follow robust risk governance and risk control policies and practices to address all significant risksFootnote5.
All entities that execute redemptions, transfers, storage, or settlement finality of the cryptoasset, or manage or invest reserve assets, are regulated and supervised, or subject to appropriate risk management standards. For a stablecoin to receive Group 1 treatment, the issuer must be prudentially regulated and subject to capital and liquidity requirements that are comparable to those of OSFI.
Group 2 cryptoassets are those that fail to meet one or more of the above criteria.

A cryptoasset exposure is a Group 1 exposure if its value or risk is substantially determined by the value of a Group 1 cryptoasset. Otherwise, it is a Group 2 cryptoasset exposure.

The above constitutes a simplified categorization relative to the second consultation paper on the prudential treatment of cryptoassets published by the Basel Committee on Banking Supervision (BCBS) in June 2022
…
Group 2 cryptoasset exposures in the banking book should be deducted from Common Equity Tier 1 (CET1) capital. As short positions have unlimited risk, short positions in cryptoasset exposures are not permitted in the banking book, consistent with the treatment of other short positions. The treatment of Group 2 cryptoasset exposures in the trading book is outlined in Section 4.4 below.

This entry was posted on Thursday, August 18th, 2022 at 9:42 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.