Canadian banks and insurers must limit their exposure to crypto assets to a small fraction of their capital under new interim rules from the country’s financial regulator.

Financial firms need to notify the Office of the Superintendent of Financial Institutions if their gross exposure to type 2 crypto assets -- which, under the regulator’s definition, would likely encompass most cryptocurrencies -- exceeds 1 per cent of their Tier 1 capital, the regulator said Thursday. 

Firms also need to notify OSFI if their total net short positions on those assets exceed 0.1 per cent of Tier 1 capital. The rules are effective in the second quarter of 2023.

The interim rules represent the first significant framework for how Canadian financial institutions should treat cryptocurrencies, which are largely unregulated in the country. OSFI said it would update the approach to reflect future developments -- including the government’s legislative review of the topic, guidance from the Basel Committee on Banking Supervision and any related developments in the crypto market.

“We have provided this interim approach to help ensure risks in this area are managed prudently and supervised according to the principle of ‘same activity, same risk, same regulation,’” Superintendent Peter Routledge said in a statement.

Regulatory uncertainty has kept large global banks from engaging with crypto assets directly by trading them or holding them on their balance sheets. The US Federal Reserve has requested that banks notify the regulator prior to conducting crypto-related activities, but didn’t provide details on capital requirement rules for crypto.

Type 1 crypto assets -- which represent a legal claim on an underlying asset and have other safeguards in place -- may receive credit-risk capital treatment and liquidity treatment that is consistent with that applied to comparable traditional assets, according to the new guidelines.