how osfi proposes to adjust the percent industry’s cryptocurrency hazard

canada’s solvency regulator is seeking comment on its proposed approach for regulating p.c insurers’ cryptocurrency threat exposure.

in a proposed advisory to take impact in 2023 q2, the workplace of the superintendent of financial institutions (osfi) defines and categorizes two unique varieties of “cryptoasset exposures.”

“cryptoassets are digital property that use a mix of cryptography, peer-to-peer networks and a allotted ledger era together with blockchain to make secure transactions,” osfi states in a press release. “examples of cryptoassets consist of cryptocurrencies inclusive of bitcoin and ether, stablecoins, and non-fungible tokens (nfts).”

osfi keeps on make clear the capital requirements for a p.c insurer’s cryptoasset exposures. it additionally outlines its technique to collateral recognition and concerns for overseas insurance branches. public comment on osfi’s proposed treatment of cryptoasset exposures will close sept. 30.

basically, osfi’s evaluation of the chance hinges on whether or no longer the p.c insurer has obtained a criminal opinion regarding the credibility of the cryptoassets. also, osfi takes into consideration whether or not or now not there may be regulatory oversight or supervision of the percent insurer keeping the cryptoassets.

organization 1 cryptoassets percentage the subsequent criteria:

a prison opinion confirms all rights, obligations and pastimes springing up from the cryptoasset are absolutely described, legally enforceable in all applicable jurisdictions, and are steady with the dangers associated with comparable conventional assets.
a legal opinion has been obtained confirming settlement finality of the cryptoasset.
all agencies the use of cryptoassets for transfer, settlement or redeemability have to observe sturdy chance governance and risk control regulations, problem to appropriate hazard control requirements.
any insurers redeeming moving, storing, or settling the use of cryptocurrencies have to be regulated and supervised.
institution 2 cryptoassets fail to satisfy any person or more of the above standards.

osfi’s approach to credit score risk varies based on the cryptocurrency companies referred to above.

“organization 1 cryptoasset exposures have to receive a credit chance capital remedy consistent with that of comparable conventional property,” as osfi explains in its cowl letter to p.c corporations, dated aug. 18, 2022.

in a june 2022 session paper, osfi proposes an additional capital rate for exposures related to crypto infrastructure vendors, which includes “a 2.five% chance-weight upload-on for infrastructure danger (i.e. zero.2% market threat capital price)…applied to organization 1 cryptoassets.”

osfi cautions % insurers to take a prudent technique to organization 2 cryptoasset risk exposures.

“organization 2 cryptoasset exposures, which include absolutely the cost of short positions, the overall notional quantity of long-choice positions and the full notional quantity of lengthy ahead contracts have to be deducted from capital to be had,” osfi states in its proposed advisory.

exposure limits practice to institution 2 cryptocurrencies. for p.c insurers, total gross positions throughout all group 2 cryptoasset exposures can not exceed 1% of capital available. and overall net short positions of all group 2 cryptoasset exposures cannot exceed 0.1% of capital to be had.

extra regulations apply to using organization 2 cryptoassets as collateral.

“no collateral price can be ascribed to organization 2 cryptoassets (i.e. such cryptoasset collateral is subject to a one hundred% haircut),” as osfi explains in its cowl letter to p.c insurers. “collateral used as a monetary aid to lessen capital requirements can not consist of institution 2 cryptoasset exposures (e.g., collateral used for unregistered reinsurance).”

moreover, overseas insurance branches aren’t allowed to vest their cryptoasset exposures in canada.

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