Our Response to OSFI’s Interim Proposal for the Regulatory Capital and Liquidity Treatment of Cryptoasset Exposures

  • The Canadian Web3 Council (CW3) is pleased to respond to the Office of the Superintendent of Financial Institutions’ (OSFI) consultations on the Interim arrangements for the regulatory capital and liquidity treatment of cryptoasset exposures.

In particular, this submission is focused on the potential impact of the draft guidelines on the Web3 ecosystem in Canada – specifically:

  • The opportunity of Web3 technologies and their usage among Canadians;
  • the likeliness of stifling innovations involving cryptoassets under the interim measures;
  • how the proposed measures will negatively impact access to insurance and custodial solutions for crypto exchanges;
  • the ways the proposed measures could further limit the availability of banking services for those in the Web3 industry; and
  • why further consideration should be given to the classification of certain cryptoassets.

Given these concerns, we urge further consultation with stakeholders beyond FRFIs and consideration of the implications beyond core financial sector policy objectives. Ensuring user adoption of compliant products is the best way to combat bad actors. However, it must be done with all players at the table. Given the complexity and ever evolving nature, regulators simply cannot go it alone without industry expertise. The Canadian ecosystem has matured significantly in the last few years, and is eager to share expertise, insights and data to inform robust policymaking for Web3.

The opportunity

Web3 technologies, which includes blockchain and cryptocurrencies, are changing the world and Canada has the opportunity to become an industry leader. Beyond its incredible economic potential, it offers new standards of efficiency, transparency, and coordination, which are critical to helping solve some of the greatest challenges facing the digital economy.

Much like the early days of the Internet, blockchains have unleashed a wave of innovation and creativity for a generation of entrepreneurs. Their inventions include decentralized applications furthering financial inclusion, NFT standards that empower artists to earn a living, and payment systems that enable migrant workers to send payments home instantaneously with almost no cost.

Before Canadians are able to fully access this revolutionary technology, we need to give Canadian entrepreneurs a workable regulatory landscape, and the tools to succeed in building next-generation products that leverage Web3 technology. Canadians have played a critical role in inventing and building many of the most successful projects in this global industry currently valued in the trillions of dollars.

Canadians are embracing Web3

CW3 undertook a poll in April to determine Canadians’ views of this growing industry (source: Nanos). The data demonstrates that Canadians are embracing Web3 technologies:

  • 10% of Canadians have a crypto wallet, the same as the number of people with RRIFs (10%) and slightly lower than those investing in RESPs (14%).
  • Canadians who have heard of cryptocurrency and have a positive impression of it most often say so because it is a promising alternative investment tool and it’s the future (44%).

Those surveyed also expressed strong support for a regulatory framework that supports the public interest, with three in five Canadians demonstrating support for the Federal Government working with cryptocurrency experts to introduce new regulations or laws around cryptocurrency.


Encouraging innovation

Digital assets, ranging from cryptocurrencies like bitcoin to various tokenized financial or nonfinancial assets, represent new efforts to advance the digital economy and deliver new ways to increase speed, efficiency, and transparency in financial services for consumers and businesses. CW3 is concerned that the interim arrangements risk limiting the development of Canadian crypto platforms and unintentionally advantaging foreign crypto platforms that are more challenging for Canadian regulators to supervise, if they are regulated at all. Doing so may undermine key policy objectives such as protecting Canadian investors and ensuring AML/CTF and sanctions compliance, in addition to ensuring Canadian crypto platforms can compete fairly with foreign competitors.
Therefore, when reviewing its guidance, OSFI should consider the undermining effect that the treatment of Digital Token Identifiers (DTI) and liquidity cryptoasset exposures could have on Canadian crypto platforms. For illustration purposes, having a 1% limit of Tier 1 capital (implying banks can hold between $2.7 billion and $5.5 billion of cryptoassets) could potentially lead to the stifling of innovations involving cryptoassets and the slower adoption of cryptoassets at DTIs as an asset class.


Access to financial institutions

Access to financial institutions remains challenging for the Web3 sector – only a handful of banks are fully involved in directly holding or lending crypto – and the interim advisory further risks cutting off access to banking services for the industry. The practical implication of the interim guidance is that FRFIs will be even more reluctant to bank platforms which in turn will further disadvantage Canadian players and give preference to foreign platforms, many of which are unregulated. This scenario creates a Canadian investor protection risk and as such, OSFI should be consulting with stakeholders in the cryptoasset industry about the second order effects of their guidance.

The participation of traditional financial institutions in the Web3 economy also has the potential to reduce volatility, and to have stabilizing effects. Canada’s FRFIs are governed by strict standards, and their participation in the Web3 economy would help ameliorate systemic risks that OSFI is trying to solve for. We believe that limiting the participation of FRFIs undermines the policy objectives OSFI is trying to solve for. We therefore encourage the regulator to work towards a model where FRFIs can continue to innovate responsibly.


Access to insurance and custodial solutions

Crypto platforms are required by the crypto regulation framework under provincial securities laws to have insurance and qualified custodians, which must be trust companies or banks regulated in Canada or a foreign jurisdiction. To date, there are no federally regulated insurance companies that offer insurance that would meet crypto platforms’ needs as well as no federally regulated banks or trust companies that serve the crypto custody market.

We are therefore concerned that some requirements under the interim arrangements, including but not limited to, the requirement that insurance companies deduct the full notional amount of any derivative referencing a cryptoasset, might undermine Canadian platforms’ access to an already underdeveloped insurance market and force Canadian platforms to rely exclusively on foreign cryptoasset custodians, increasing costs relative to foreign competitors and putting Canadians’ cryptoassets beyond the jurisdiction of Canadian regulators and courts. American regulators have recognized this concern and developed frameworks that allow for domestic custody to take form. This move marks an important milestone for traditional banks and their growing acceptance of digital assets as a legitimate market and a source of new business.


The varying characteristics of cryptoassets

CW3 submits that the uniform treatment of Group 2 digital assets would result in a framework that is not risk sensitive and is insufficiently tailored to the varying characteristics of digital assets. For example, there is a finite number of bitcoins to be discovered – 21 million to be exact. It is predicted that all 21 million bitcoins will be mined by 2140. This finite supply provides a stabilizing effect on this digital asset and provides a useful example of why further disaggregation is needed in order to properly assess the risk profile of different cryptoassets. In particular, we submit that the risk profile of well-governed cryptoassets such as Bitcoin and Ethereum should be offered their own risk categorization under the final measures set forth by OSFI. We therefore recommend an approach that incorporates consideration of economic and structural factors, such as Bitcoin’s deflationary model, so that the categorization of digital assets is based on inherent, robust factors and not exclusively factors susceptible to external market trends. Economic models, consensus mechanisms, utility, and maturity, in addition to volatility, could create a more consistent and actionable approach.



CW3 believes that the interim measures have the potential to inadvertently cause additional risk in the ecosystem by hindering the ability of the Web3 industry from accessing traditional financial services.

1  OSFI is an independent agency of the Government of Canada reporting to the Minister of Finance. It is the sole regulator of banks, and the primary regulator of insurance companies, trust companies, loan companies and pension plans in Canada. A slightly different version of this submission was originally provided to OSFI on Oct 14, 2022. We modified this submission to shorten it for a broader audience, but the content is the same.  BNY Mellon won the approval of New York’s financial regulator earlier this fall to begin receiving select customers’ bitcoin and ether. The bank will store the keys required to access and transfer those assets, and provide the same bookkeeping services on those digital currencies that it offers to fund managers for their portfolios of stocks, bonds, commodities and other assets.