OSFI Allows Greater Crypto Asset Exposure For Banks And Insurers

In late October 2025, Canada's federal banking and insurance regulator – the Office of the Superintendent of Financial Institutions ("OSFI") – released updated guidance on how federally regulated financial institutions ("FRFIs") are to treat crypto asset exposures for regulatory capital and liquidity purposes. These updates introduce targeted changes that ease certain restrictions on crypto asset exposures while preserving a prudent, risk-based approach.

OSFI's October 29, 2025 letter to industry amends two comprehensive guidelines detailing the capital treatment of crypto-asset exposures that OSFI published in February 2025 (see our prior bulletin here): "Capital and Liquidity Treatment of Crypto-Asset Exposures (Banking) – Guideline", and "Capital Treatment of Crypto-Asset Exposures (Insurance) – Guideline" and announces two important changes to the capital treatment of crypto asset exposures for FRFIs:

• Greater Crypto Exposure Limit: Banks and insurers may now have up to 5% of their Tier 1 capital in certain crypto assets (Group 2 assets, i.e. Bitcoin, Ether and other cryptocurrencies, as further described below), raising the limit from the previous 1% cap. In other words, OSFI will tolerate a larger share of a firm's capital being tied up in crypto assets. This change recognizes the growth of crypto markets and its rapid integration into the traditional finance markets, allowing more room for regulated institutions to participate.
• Removal of the 1% "Group 2b" Punitive Treatment: Previously, if a FRFIs' exposure to riskier crypto assets exceeded 1% of its Tier 1 capital, OSFI required those exposures to be outright treated as Group 2b assets. Such reclassification represents the most punitive capital treatment entailing a 1250% risk weight, effectively dollar-for-dollar capital requirements, and hedging is not recognized. Under the updated guidelines, this automatic reclassification no longer applies. FRFIs can now exceed the previous 1% threshold up to the new 5% limit without immediately incurring the harshest capital charge. In practice, this means an institution can hold a larger amount of crypto assets and have those exposures treated with the standard Group 2a capital rules (described below) instead of being automatically subject to the full deduction treatment.

These changes take effect for reporting periods after November 1, 2025 (for October 31 year-end institutions) or January 1, 2026 (for December 31 year-ends). The revisions mark a notable but measured shift in OSFI's crypto policy stance. OSFI itself describes the updated approach as "more risk-sensitive" than the interim conservative stance it adopted back in August 2022.

In practice, for a large bank with, say, $50 billion in Tier 1 capital, this raises the allowable crypto exposure from $500 million to $2.5 billion representing a significant increase. This could facilitate more involvement of these institutions in the crypto market.

That said, OSFI still expects FRFIs to stay below the 5% hard ceiling. Breaching the 5% cap must be reported immediately and rapidly rectified, and if it happens, all Group 2 crypto exposures of such FRFI would then be reclassified as Group 2b assets and be subject to the full deduction treatment.

Further, OSFI explicitly noted it will continue examining issues like (i) the appropriate risk weight for Group 2a assets currently 100% under the standard approach, (ii) whether certain crypto assets could be recognized as collateral, and (iii) how to treat cross-market hedging strategies. These areas could lead to further changes that might eventually allow banks to use crypto assets as loan collateral. Notably, OSFI acknowledges rising industry interest in bitcoin-backed lending, a trend already being explored by major U.S. financial institutions, reflecting a measured openness to innovation.

Overall, OSFI's latest guidance represents a calibrated softening of its crypto stance. It aligns with international standards (Basel's crypto asset framework) while incorporating industry feedback to be less restrictive. FRFIs that are dabbling in crypto will benefit from clearer rules and a somewhat larger capacity to engage. Banks and insurers active in crypto will still need to continuously monitor their positions relative to capital, maintain rigorous risk assessments, and be prepared to justify their crypto activities to OSFI.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025