Canada clarifies rules for tokenized bank deposits

The Financial Supervisory Authority of Canada clarifies rules for tokenized bank deposits

Points of clarification from OSFI on September 10

Tokenized deposits are not legally different from traditional deposits solely because they are recorded or transferred through digital ledger technology.

Rule unchanged

Banks must communicate with the Financial Supervisory Authority of Canada (OSFI) before launching innovative services and continue to assume responsibility for compliance, network resilience and third-party provider management.

Legal definition is clearer

In its September 10 statement, the Financial Supervisory Authority of Canada said it adopts a technology-neutral approach to financial products. The statement confirms that the technology used to record or transfer deposits does not determine their legal treatment.

For banks, this removes a basic obstacle. Banks can view deposit tokens as a form of existing deposit products rather than first proving that blockchain has created a completely new liability class. However, OSFI did not approve a national launch plan or exempt individual products from regulatory expectations.

Another capital and liquidity guide released on the same day treats eligible bank tokenized claims (including deposits) as tokenized traditional assets. The rule will take effect in November 2026 or January 2027, depending on the agency's fiscal year. The rule explains how banks should apply capital and liquidity requirements when holding or issuing eligible tokenized assets, but does not stipulate the design of future deposit products.

The actual meaning of tokenized deposits

Tokenized deposits are still funds held at the issuing bank. The difference is that ownership and transfers can be represented through a digital ledger, allowing that deposit to be used in automated payment or settlement processes.

This distinction is crucial because tokenized deposits do not remove customer funds from the banking system or convert them into publicly traded stablecoins. It could make existing bank funds easier to use outside the irregular processing window, while retaining the legal relationship between customers and their banks.

Technology still needs to address banking issues

Before banks can offer such products, they must decide who can hold and transfer tokens, what authentication to apply, how to handle erroneous transfers, and whether an external provider operates a wallet or ledger. OSFI made it clear that banks are still responsible for managing these arrangements even if the technology is provided by a third party.

The potential benefits are practical. In a well-designed system, tokenized deposits may allow companies to release funds after delivery conditions are met, rebalance liquidity after normal bank deadlines, or settle tokenized assets with cash with less reconciliation work.

However, these gains are accompanied by new operational pressures, as the Bank of Canada points out, automated systems can reduce latency, but coding errors and connected ledgers can also spread interruptions faster. As a result, banks need to establish rules on access, transaction limits, recovery and manual intervention before speed becomes commercially practical.

One bank's token is not another bank's currency

The biggest problem is not to put deposits into the blockchain, but to make the deposits available at different times at the user's bank. Tokens issued by Bank A are still claims against Bank A, with their own credit relationship, access rules and compliance checks.

Recent international testing has shown the importance of this distinction. DBS and Citi tested 24/7 tokenized dollar payments, showing that bank-issued funds can move outside normal bank hours. However, final settlement still uses established banking infrastructure. The test proves that the technology can improve execution efficiency; but it does not prove that banks have created a shared pool of digital funds.

Swift's blockchain ledger initiative is trying to solve cross-bank issues. Its success will depend on common rules for settlement, compliance, error handling and the legal treatment of claims when participating institutions fail.

Canada clarifies the product but does not prove the feasibility of the network

OSFI's statement provides a clearer legal basis for Canadian banks to test tokenized deposits. Possible first-time use scenarios will be control services for corporate payments, treasury management and tokenized market settlements, where banks can restrict participants in advance and define responsibilities.

Canada has clarified the definition of tokenized deposits, but Canadian banks still need to demonstrate that they can settle reliably outside of the issuing bank's own systems.