Canada's regulator just confirmed why banks tokenize first

Sep 23, 2026

6 min read

Summarize with AI

On September 10, 2026, Canada’s Office of the Superintendent of Financial Institutions (OSFI) said that tokenized deposits are not legally distinct from traditional deposits. The technology used to build or deliver a product doesn’t decide its legal nature. What matters is what the product is.

Most of the coverage read this as a crypto story. I would read it as a story about technology neutrality, and as the clearest confirmation so far of an argument I made back in March in Banks Will Tokenize First: banks will tokenize financial instruments at scale before startups do, because they don’t need new permission to do it.

Andrew Nalichaev, Blockchain and DeFi Expert..

By Andrew Nalichaev

Blockchain Expert & DeFi Analyst

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Every article at Innowise is created by authors with real-world experience. They understand the topic beyond theory and bring insight from real projects.

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Andrew translates decentralized concepts into secure, functional financial tools. He navigates the volatile DeFi landscape to build scalable blockchain infrastructures that address real-world utility, moving past the buzzwords to deliver technical value.

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What OSFI actually said, and what it did not

The substance is narrow and worth reading carefully.

A tokenized deposit stays a deposit offered by the institution. The bank keeps responsibility for the underlying obligation. Distributed ledger technology changes how the claim is represented and transferred, not what it is under the existing framework. That is the whole ruling.

Now the part that got much less attention. Institutions remain responsible for the existing legal, technology, cyber and third-party risk requirements, and OSFI expects banks to consult their lead supervisors before launching a novel product. So the legal question is settled, and the operational one is wide open. Those are two different problems, and the second one is the expensive one.

I would frame it this way for any bank reading it: you no longer have to argue that your product is legal. You still have to prove that you can run it.

A tokenized deposit remains a deposit under the existing banking framework, even when the underlying technology changes.

Why this was predictable

The argument I made in March was about structure. Whether regulators would turn friendly never entered into it.

Tokenization at scale needs a set of preconditions: a license, compliance infrastructure, custody capability, institutional relationships. A startup builds those from zero, spending years and millions before the first token moves. For a bank, they are existing overhead. The advantage that creates is permission, and no amount of engineering substitutes for it.

Permission also works asymmetrically. When a bank tokenizes a deposit, it exercises a right it already holds. When a startup tries to issue a tokenized investment product, it asks a regulator for a new right, inside a framework that may simply refuse to grant it. I have worked through more than a hundred tokenization concepts, and the failure pattern is consistent: roughly 90% die at the regulatory stage, long before engineering or the business model ever gets tested. I broke that failure taxonomy down in What Kills Most Tokenization Projects.

OSFI just wrote that asymmetry into supervisory language. A deposit is a deposit regardless of the rail. That sentence is worth more to a Canadian bank than any amount of crypto legislation, because it removes the only question that was genuinely open.

Canada is not an exception, but part of a broader trend

This is the part I would stress with clients, because one regulator can look like a local event.

Look at what banks were already doing while waiting for nobody’s permission. JPMorgan runs roughly $7B daily in tokenized deposits through Kinexys, between its own clients. BNY launched Digital Cash in January 2026 with six institutional participants including ICE, Citadel Securities and Circle. The UK Regulated Liability Network moved from experimentation with 11 entities to a live pilot with 7 banks running through mid-2026. In almost none of these cases did anyone acquire a new license. A tokenized deposit is a deposit under banking law, a tokenized fund is a fund under securities law, and the entire compliance apparatus carries over unchanged.

The US drew the same line from the opposite direction. The GENIUS Act of July 2025 created a federal stablecoin framework with one decisive provision: stablecoins cannot pay interest, because they are payment instruments. Tokenized deposits sit in the other box. They earn yield; they live under banking law. Different jurisdiction, different mechanism, identical logic: the regulator classifies by economic and legal substance, and the rail is irrelevant.

So OSFI stated plainly what was already implicit in how every serious supervisor has been treating this.

What changes, and what does not

Here is where I would push back on the optimism a bit.

Legal clarity removes an argument. Building the product is a separate job, and it is the one OSFI actually described: cyber risk, third-party risk, technology risk, and a supervisory conversation before launch. In practice, that means key management and custody design, the reconciliation layer between the on-chain representation and the core banking ledger, incident response for a system where settlement is final, and a vendor chain that a supervisor will accept. All of that is exactly as hard on September 11 as it was on September 9.

The bigger structural limit is untouched. Legal equivalence inside one institution does nothing for fungibility between institutions. A JPMorgan tokenized deposit and a BNY tokenized deposit are both US dollar demand deposits at regulated banks, and they remain non-interchangeable. Each bank mints its own on-chain money inside its own walls. I call this the cash island problem, and a ruling like OSFI’s makes islands easier to build while leaving the bridges exactly where they were. Canadian banks can now issue with confidence, and they will issue into separate pools.

That gap is the real opportunity, and I wrote about where it gets solved in DeFi Is the Missing Liquidity Layer for Tokenized Assets.

Tokenized deposits may be easier to issue, but interoperability is still unresolved. Each bank can build its own cash island, while the bridges between them remain missing.

What I would do with this

If you are a bank. The legal precondition is handled, so the question moves to whether you can operate the thing. I would start from the supervisory conversation before the contract, because OSFI told you to, and because the answers you give there will constrain your architecture anyway. Then the honest scoping: custody model, reconciliation between chain and core, revocation and freeze capability, third-party risk across the vendor chain, and an audit trail a supervisor can reconstruct without your engineers explaining it. That list is unglamorous, and it is where the budget goes. The infrastructure underneath any RWA project is almost always something other than the token contract.
If you are a startup. Competing on issuance against a bank that just got told its product is already legal is a fight worth skipping. The terrain belongs to them. Where the demand is real is infrastructure that banks deploy under their own brand: custody, compliance automation, issuance tooling, reconciliation, secondary market execution. And longer term, the connective layer between institutional cash islands and open liquidity, which remains unbuilt and which banks are structurally unable to build themselves.
If you are neither. The useful signal is that the regulatory conversation has moved on. For a while the question was whether tokenized money is allowed. That question is closing. The open questions now are operational and architectural, which is a much better place to be, and a much less forgiving one.

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