Industry input sought on new crypto-asset guidance

While industries seldom relish regulation, Canada’s property and casualty (P&C) insurers can take solace in the knowledge that draft rules around their exposure to crypto-assets are limited.

That’s because the latest Office of the Superintendent of Financial Institutions (OSFI) draft guidelines only allow P&C insurers to hold a single category of crypto-assets for collateral purposes.

“Only Group 1a crypto-assets that are tokenized versions of the instruments included on the list of eligible financial collateral set out in the LICAT, MCT or MICAT may qualify for recognition as eligible collateral,” said draft guidelines from Canada’s solvency regulator. P&C insurers are covered by the MCT, or minimum capital test. The other two tests apply to life insurers and mortgage insurers.

Group 1a crypto-assets are also known as tokenized traditional assets. As the name implies, they are largely subject to the same expectations around risk capital requirements as their traditional counterparts which trade on equity markets.

“For example,” OSFI’s draft said, “a tokenized corporate bond will be subject to the same risk factor as the non-tokenized corporate bond.”

The logic for that direction is that if both exposures grant the same rights to things like cash flows, claims in insolvency and asset ownership, and the same likelihood of repayment of all amounts due on time (including in cases of default), then value and credit-loss risks would be similar.

“Insurers should separately assess the tokenized traditional asset against these expectations, and not assume qualification for a given treatment simply because the traditional (non-tokenized) asset qualifies,” OSFI said.

It used the example of a tokenized asset that has different market liquidity characteristics from its non-tokenized counterpart.

“This could arise because the pool of potential investors that are able to hold tokenized assets might be different than for non-tokenized assets,” the regulator said.

It also noted the speed with which a secured creditor could take possession of crypto-asset collateral may be different than for a traditional asset.

Plus, insurers should determine whether those same assets could be sold efficiently in the event of a downturn in the stock or bond markets.

“Crypto-assets shall only be recognized as collateral where volatility in values and holding periods under distressed market conditions can be confirmed to not be materially increased compared with the traditional asset or pool of traditional assets,” the draft guidance stressed.

OSFI’s latest guidance responds to public comments on a set of interim guidelines that took effect last August. A public comment period on the newest guidance is open until Sept. 20, 2023. Comments can be sent to consultations@osfi‑bsif.gc.ca.

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