Introduction to Stablecoins
The Bank of Canada is calling for the federal government to consider regulating stablecoins, a type of cryptocurrency tied to a fiat currency or stable commodity. This comes as interest in digital assets grows in Canada and the United States pushes for widespread adoption.
What are Stablecoins?
Stablecoins are a kind of cryptocurrency pegged one-to-one to a fiat currency, such as the US dollar, or a stable commodity like gold. They have mainly been used for speculative trading, but proponents argue they could make money transfers faster and less costly. However, critics warn that their decentralized nature could facilitate illegal financial transactions, and they may be vulnerable to cyberattacks or insufficient collateral backing.
Regulation of Stablecoins
In July, the US passed the GENIUS Act, establishing a framework for regulating stablecoins. The act sets out rules for the type of collateral that can back stablecoins and implements consumer protection measures. The Bank of Canada’s executive director of payments, Ron Morrow, says Canada should weigh the merits of federal stablecoin regulation, similar to what other countries have done. Currently, oversight of digital assets in Canada rests with provincial securities regulators, while the federal Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) oversees virtual currency exchange or transfer services.
The Need for Regulation
Morrow emphasizes that governments are moving to regulate stablecoins and other cryptocurrencies to protect consumers from credit and liquidity risks. Many jurisdictions worldwide either have or will soon have a regulatory framework for cryptoassets. He calls on federal and provincial regulators to "work quickly and collaboratively to evolve our regulatory frameworks."
Adoption of Stablecoins
Stablecoins have begun to enter the mainstream since their introduction in 2014. Stablecoin issuer Circle Internet Group Inc. went public in July, raising $1.1 billion. US banks like Bank of America and Citigroup are considering launching their own stablecoins, and PayPal and Visa now offer stablecoin payment options. In Canada, companies like Shopify and Tetra Digital Group are adopting the technology, with Shopify launching a stablecoin option for merchants and Tetra Digital Group planning to launch a Canadian-dollar-backed stablecoin in 2026.
Canada’s Lag in Payments Innovation
Morrow notes that Canada has lagged behind other jurisdictions in payments and financial system innovation. The Real-Time Rail payment system has been delayed for years, although industry testing is expected to begin soon. The 2024 open banking act still requires additional legislative changes to become functional. Morrow stresses that "the pace of change here in Canada has been – to use a kind word – gradual" and that there is a need to accelerate change within the country’s borders.
Conclusion
The Bank of Canada’s call for regulating stablecoins highlights the need for Canada to catch up with other countries in developing rules for digital assets. As interest in stablecoins grows, it is essential for the government to weigh the benefits and risks of these cryptocurrencies and work towards creating a regulatory framework that protects consumers and promotes innovation. By doing so, Canada can ensure that it remains competitive in the global financial landscape and provides a safe and secure environment for the adoption of stablecoins and other digital assets.
