As digital assets and blockchain technology reshape the world of finance, Canadian banks, non-bank lenders, and their legal advisers are confronting significant complexities. Lending against crypto, regulatory oversight of digital finance, and unique risks tied to blockchain platforms now demand in-depth legal analysis. We have spoken about some of these issues in recent articles.

Legal characterization of crypto assets in the banking context

Canadian law recognizes cryptocurrencies and digital tokens as a form of “property,” but not legal tender. For banks and lenders, this characterization directly impacts how digital assets can be accepted as collateral, managed in secured transactions, or seized in insolvency scenarios. Moreover, certain crypto assets may be classified as securities or derivatives, which places them under heightened regulatory scrutiny by the Canadian Securities Administrators (CSA).

Key legal considerations:

  • Banks must evaluate the type of digital asset: Is it a “security,” a “derivative,” or a distinct form of property?
  • Regulatory compliance is required if lending arrangements involve regulated digital tokens or trading platforms.

Blockchain-based lending: Opportunities and legal pitfalls

Blockchain technology is disrupting traditional lending platforms through innovations such as decentralized finance (DeFi) protocols, crypto collateral and smart contracts. Smart contracts (self-executing contracts where the terms of the agreement are set in code and stored on a blockchain) can automate disbursement, repayment, and collateral management. However, enforceability and risk allocation present real legal challenges for banks and lenders:

  • Enforceability: For a smart contract to be binding, the parties must be ascertainable and the agreement must be sufficiently certain. Enforcement is complex if disputes arise. Disputes relating to code errors, interpretation, and jurisdiction are still testing the Canadian courts.
  • Security interests: Lenders must ensure that security interests in digital collateral are validly created, properly perfected, and have legal priority. Current provincial Personal Property Security Act (PPSA) regimes do not explicitly contemplate crypto assets or confirm their status as possible collateral.
  • Due diligence: Assessing the risk profile of digital borrowers and the reliability of DeFi platforms is complicated by pseudonymity and the absence of traditional credit checks and recourse mechanisms.

Crypto as collateral: Issues for secured lending

Increasingly, both banks and alternative lenders are being asked to accept cryptocurrencies as collateral for loans. While this offers clients flexibility and access to liquidity, it introduces new legal and operational issues.

Main concerns:

  • Asset control: Perfecting a security interest in a digital asset may require “control” of the private keys or arrangements with custodians, which is a departure from traditional collateral mechanics.
  • Segregation and custody: Use of third-party custodians must be carefully reviewed to ensure lender security interests remain enforceable if the custodian faces insolvency.
  • Asset location and conflict of laws: Because digital assets can reside on decentralized blockchains not tied to a single jurisdiction, lenders must determine which law governs the perfection and priority of their interests.
  • Regulatory uncertainty: Regulations are constantly changing (discussed below). Regulators currently classify digital assets as high risk and this exposure has capital implications for Lenders.

Regulatory developments affecting banking and lending

Regulators are responding to these innovations through evolving guidance and proposed reforms:

  • The CSA requires registration and ongoing oversight of crypto trading and custody platforms, with specific expectations for safeguarding client assets and mitigating risk. 
  • The Office of the Superintendent of Financial Institutions (OSFI) has issued new guidelines that will take effect in 2026, replacing the current interim measures and tightening capital and liquidity frameworks for institutions holding crypto exposure
  • Anti-money laundering (AML) and know your client (KYC) compliance are mandatory for all financial institutions handling digital asset-backed loans under FINTRAC.
  • International developments, such as amendments to the U.S. Uniform Commercial Code (UCC), are influencing dialogue in Canada about modernizing secured transactions laws to address digital asset collateral.

Practical guidance for banks and lenders

Banks and lenders embracing digital finance should consider the following:

  • Collaborate with legal counsel to assess the legal status of digital assets used as collateral or payment.
  • Implement robust protocols for custody, control, and realization of crypto collateral.
  • Stay abreast of evolving legislative reforms and regulatory interpretations relating to DeFi, crypto assets, and blockchain-based lending.
  • Regularly update internal AML/KYC procedures to account for unique digital asset risks and regulatory expectations.

Canadian banks

Chartered banks in Canada are not prohibited from accepting crypto as collateral, but currently no major chartered bank in Canada offers crypto-secured loans. Borrowers would have to use a crypto-native lender or DeFi platforms when using crypto to unlock liquidity.

Conclusion

Canadian banks and lenders are entering a new era, marked by the opportunities and risks of digital assets and decentralized finance. As legal and regulatory frameworks continue to evolve, proactive engagement with legal and compliance professionals will be essential for navigating this dynamic environment, ensuring sound risk management, and maintaining regulatory compliance.

For advice tailored to your organization’s needs, we invite you to contact a member of our Financial Services team. We would be pleased to assist you in assessing your exposure, adapting your practices, and staying ahead of regulatory developments.