Introduction to Stablecoins and the Future of Money

The Bank of Canada is emphasizing the importance of stable and secure money as private digital currencies, known as stablecoins, become more popular and raise questions about the future of the global money system. Governor Tiff Macklem highlighted the need for "good" money that is safe, easy to use, and has a stable purchasing power.

What are Stablecoins?

Stablecoins are a type of digital currency whose value is pegged one-to-one to a national currency, such as the U.S. dollar. This is different from other popular cryptocurrencies like Bitcoin, whose value can fluctuate wildly. Stablecoins have begun to go mainstream following the passage of the GENIUS Act in the U.S., which regulates U.S. Dollar-denominated stablecoins.

Benefits and Risks of Stablecoins

Advocates of stablecoins say they have the potential to improve the speed and cost of financial transactions. However, skeptics worry that they come with financial stability risks, as they are neither backed by the central bank nor covered by deposit insurance. There is also the risk of fluctuating values if a stablecoin turns out not to be fully backed by the asset it is meant to be pegged to.

Regulatory Framework for Stablecoins

The government of Canada is developing a regulatory framework for stablecoins, and has tasked the Bank of Canada with overseeing the new system. Mr. Macklem outlined the key features of a stablecoin, including being pegged at a one-to-one ratio to a central bank currency, being backed by high-quality liquid assets, and having fully disclosed conditions for redemption.

Impact on the Commercial Banking System

There are also important questions about how the commercial banking system could change if more Canadians kept their money as digital assets rather than in traditional bank accounts. This could impact how monetary policy is transmitted through the economy.

Other Financial-Sector Innovations

The Bank of Canada will also be managing other financial-sector innovations, including Canada’s long-delayed real-time rail payments system and the country’s open banking system. The open banking system is designed to give individuals more control over their financial data, with the goal of allowing more financial-sector competition and innovation.

Supervision and Standards

Mr. Macklem emphasized the need for supervision and high standards for technology in open banking to safeguard customer data and minimize the risk of fraud. The regimes for stablecoins and open banking must be built thoughtfully, and the regulatory framework will need to evolve to keep pace with the changing landscape.

Innovation in Traditional Lines of Work

The Bank of Canada is also working on innovation in one of its traditional lines of work: printing physical cash. A new $20 bill will be issued in early 2027, featuring King Charles III on the front and the Canadian National Vimy Memorial on the back. The new note will have new anti-counterfeiting features, combining 3-D features and features that shift when the note is moved.

Review of Monetary Policy Framework

The Bank of Canada will also be conducting a five-year review of its monetary policy framework next year. Mr. Macklem reiterated that the bank will not be reassessing its 2-per-cent inflation target, but will be looking more closely at the connection between inflation and housing affordability, as well as thinking about new ways to conduct monetary policy in a rapidly changing world.

Conclusion

In conclusion, the Bank of Canada is taking a thoughtful and cautious approach to the development of stablecoins and other financial-sector innovations. By emphasizing the importance of stable and secure money, and by building a regulatory framework that prioritizes supervision and high standards, the Bank of Canada is working to ensure that Canadians can benefit from new technology and new services, safely and securely. As the financial landscape continues to evolve, it will be important for the Bank of Canada to stay ahead of the curve and to continue to prioritize the stability and security of the financial system.