Key Takeaways
- Stablecoins are becoming increasingly popular in Canada, prompting the federal government to regulate them.
- Proposed stablecoin rules aim to introduce asset management requirements to bolster domestic financial sovereignty and counter foreign digital currency influence.
- The government aims to foster a domestic, Canadian dollar-backed stablecoin ecosystem.
- Stablecoins bridge the gap between traditional and digital finance, promoting financial inclusion and efficient international transfers.
- Regulation is being called for to address concerns over Canadian monetary sovereignty and financial stability.
Introduction to Stablecoins
Stablecoins are a type of cryptocurrency token built on a blockchain network, designed to maintain a steady value redeemable for a pegged flat currency, such as a Canadian or American dollar, on a 1:1 basis. The backing of a dollar ensures their stable value. Unlike volatile assets like Bitcoin, stablecoins are centralized, issued and managed by companies or issuers like Tether and Circle, and designed for everyday transactions. Adam Garetson, partner of blockchain and fintech at Gowling WLG, explains that stablecoins are "designed to be the equivalent of holding cash at the end of the day, just digitally, on a blockchain, on the computer."
The Importance of Stablecoins
Stablecoins matter because they bridge the gap between traditional and digital finance. They act as primary on-ramps and off-ramps for the crypto ecosystem, according to a report from Mastercard. International transfers can be settled within minutes at minimal costs, 24/7, offering an efficient alternative to slow, expensive traditional wire transfers. This promotes financial inclusion for the world’s unbanked populations, requiring only an internet connection and a digital wallet to access global financial services.
Regulation and Monetary Sovereignty
The Bank of Canada and cryptocurrency industry groups say the main concern for Ottawa is the potential impact on Canadian monetary sovereignty and financial stability, particularly as financial markets see an increase of U.S. backed digital currencies. The U.S. introduced the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, a law designed to enforce the use and support of the U.S. dollar as a stablecoin. Vass Bednar, managing director of the Canadian SHIELD Institute for Public Policy, notes that "large firms like Shopify moved quickly to accept USDC," and that "when our most valuable company is transacting through stablecoin, the policy environment here needs to recognize that innovation."
Proposed Rules for Stablecoin Issuers
Budget 2025 will bring legislation to establish rules for stablecoin issuers with Bill C-15. The rules will require genuine support of the digital assets and deal with issues of risk management, information privacy, and national security. The Stablecoin Act governs issuers, including the issuance, creation, and redemption of stable coins. An investor could go to an issuer, give them cash for stable coins, and then use the currency on digital financial markets such as Kraken or Coinbase. However, issuers of the coin cannot generate interest on supported dollars.
Preparation and Enforcement
Adam Garetson advises businesses to begin preparing now by aligning with governance, compliance, and operational systems. Vass Bednar expects the legislation to pass early next year, with opposition parties backing it. The draft law includes a strict ban on issuers paying interest or yield on stablecoins, and federal, provincial securities laws still apply. The Act also mandates stablecoin issuers use qualified custodians to hold reserves, ensuring assets are backed, separate from the issuer’s own funds, and protected from bankruptcy. However, Bednar notes that the legislation is silent about who can act as a qualified custodian, and where, geographically, reserve assets must be held.
Conclusion
In conclusion, stablecoins are becoming increasingly popular in Canada, and the federal government is taking steps to regulate them. The proposed rules aim to introduce asset management requirements to bolster domestic financial sovereignty and counter foreign digital currency influence. Businesses and individuals should be aware of the upcoming changes and prepare accordingly. As Bednar notes, "Canadians expect regulatory environments to reflect and anticipate the realities of today, and not be in constant catch-up mode." The future of stablecoins in Canada will be shaped by the upcoming legislation, and it is essential to stay informed and adapt to the changing regulatory landscape.