As the popularity of digital assets skyrockets, Canadian fintech companies want to make progress on regulation.
Next week's federal budget purports to contain the updates that FinTech leaders in Canada are calling for: open banking system and the “language” around stablecoins.
“Regulation doesn't mean harming innovation. It just needs to be well done and well thought out. That's what we're trying to achieve in Canada.”
Whether or not stablecoins are mentioned in the national budget, FinTech leaders say the digital asset is set to disrupt traditional payment methods. But how Canada will or should regulate stablecoins remains an open question.
Over the past year, stablecoin transaction volume has tripled compared to Visa to reach $46 trillion, according to venture capital firm Andreessen Horowitz. eat more market.
A stablecoin is a cryptocurrency that is pegged to another reserve asset, usually a currency such as the US dollar. When a consumer purchases a digital token, the issuer presumably guarantees that it has equivalent cash in reserves. The digital asset promises speed and convenience compared to traditional bank transfer systems, which are subject to intermediary fees and limited operating hours.
At the Canadian Fintech Forum in Montreal, Luge Capital partner Karim Gillani made a compelling case for stablecoins as a faster, less expensive and easier way to make cross-border payments.
“This is not just some theoretical science fair project,” Gillani said. “It's happening right now.”
Laure Fouin, deputy general counsel at Coinbase Canada, told BetaKit that stablecoins are a way to “bring hope to cryptocurrency” to Canadians. She said low fees and instant transfers could especially help newcomers to Canada send money to relatives abroad.
Canadian fintech and cryptocurrency leaders are beating the drum that Canada will be left in economic dust unless federal authorities take swift action to regulate stablecoins. The vast majority of stablecoins in circulation are pegged to the US dollar, such as USDC. The US also recently adopted GENIUS Actwhich regulates which entities can issue stablecoins and how much money they need to hold in reserve. Technology company leaders say the legislation is needed to avoid Canada “falling behind” and maintain control of its payments infrastructure.
CONNECTED: Canadian Digital Sovereignty: Why We Can't Ignore Stablecoins
The industry is moving quickly to keep up with the times. JPMorgan has launched a stablecoin-like asset in the US, and PayPal and Visa now offer stablecoin payment options. Canada's Most Valuable Tech Company Shopify Now supports payments merchants via USDC in partnership with Stripe and Coinbase.
In line with industry demands, bank executives and regulators have expressed interest in Canada's stablecoin system ahead of the federal budget. Ron Morrow, executive director of payments at the central bank, said Canada lags behind other countries in developing regulations to use stablecoins. Superintendent of Financial Institutions Peter Rutledge praised bipartisan support for the GENIUS Act and called some parts of it “innovations.”Ve and cool, Logic reports this.
The problem, as with many decentralized finance methods, is that widespread use of stablecoins can provide cover for criminal behavior. According to Chaina analysis reportwhich sells compliance software for cryptocurrency companies, stablecoins now account for 63 percent of illicit transactions on the blockchain, such as money transfers to sanctioned entities. International Compliance Association stated in the report that people committing financial crimes are turning to stablecoins for the same reasons as consumers: faster transactions and lower fees.
Hubert Pan, director of the doctoral program at Western University's Ivey Business School, says the GENIUS Act is a “smart policy to copy” as Canada builds the legal infrastructure for a stablecoin.
“This will minimize most of the illegal activities,” Poon said. “If you allow a company to issue a stablecoin without [the] The government is involved in this, people are greedy and might do something shady.”
With increased usage, banks may feel a hit to their deposit base. According to the emerging market bank, a potential US$1 trillion could flow out of emerging market banks and into stablecoin wallets. Standard Charter. Poon acknowledged that banks may be wary of consumers diverting assets from their accounts as stablecoin use grows, but they have a responsibility to keep up with new financial technologies. According to Cybrid CEO Avinash Chidambaram, all major banks in Canada “either have a stablecoin strategy or are working on one.”
“If they're not ready to innovate, then they're ruined,” Poon said. “As a customer or Canadian citizen, I would simply like to have the most efficient and inexpensive payment infrastructure possible.”
Arguments in favor of a Canadian stablecoin
Although stablecoins are called “stable” because they typically have less volatility than other digital currencies such as Bitcoin, stablecoins have previously lost their peg value. Tether, which issued algorithmic stablecoin called Terra, lost about $60 billion in May 2022, helping to precipitate a crypto winter of high-profile, unregulated stock collapses that hit retail investors hard.
Cryptocurrency glitches like this are part of why the Canadian crypto industry is calling for a regulatory framework to regulate stablecoins in Canada. Industry leaders say Canada will remain at the mercy of a U.S.-dominated payments system with no strategy. Ninety-nine percent stablecoins pegged to the US dollar in the global market, according to JPMorgan.
“As a customer or Canadian citizen, I would simply like to have the most efficient and inexpensive payment infrastructure possible.”
John Ruffolo, co-founder and managing partner of Maverix Private Equity, said earlier this month in Finance post that a stablecoin strategy is necessary for Canada to maintain its economic sovereignty. If people start moving money into stablecoin wallets backed by U.S. dollars, it could raise government borrowing costs, strip central bank control and give U.S. regulators more power over Canadian companies, he said.
“If even five percent of Canadian deposits—$135 billion—moved into U.S. stablecoins, the side effects of our fractional reserve system could conservatively wipe out as much as $675 billion of domestic lending capacity,” Ruffolo wrote.
Many Canadian companies are looking to create a stablecoin backed by the Canadian dollar, although the lack of regulation puts them in a gray area for market strategy.
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Toronto Stablecorp is developing its Canadian-denominated stablecoin QCAD, raising more than $6 million this year from backers Coinbase Ventures and FTP Ventures. Stablecorp first launched QCAD in 2020. Calgary-based fintech startup Loon, a subsidiary of Paytrie, recently… raised $3 million launch a regulated, CAD-backed stablecoin. The company claims its CADC stablecoin is the leading CAD-backed stablecoin in Canada. Loon said it has pre-filed a prospectus with the Alberta Securities Commission to move closer to regulatory approval.
Tetra Trust with the support of the National Bank and other FinTech leadersformed a new parent company (Tetra Digital Group), which closed C$10 million in funding to launch a CAD-denominated stablecoin backed entirely by paper reserves. In 2021, Tetra Trust became the first in Canada regulated crypto custodian after receiving approval as a licensed trust company in Alberta and hopes to use this status to avoid filing a prospectus for a possible stablecoin issue.
Then there's VersaBank, a London-based Schedule I bank that's taking a different approach to digital assets. VersaBank has started issuing digital deposit receipts called Real Bank Deposit Tokens, a product it claims is an improved and more secure version of a “so-called stable coin.”
David Taylor, founder and CEO of VersaBank, told BetaKit that Ottawa is “feeling the heat” to pass something similar to the Genius Act. “I think no, this shouldn’t happen,” Taylor said. “You already have a bank in Canada with well-developed technology, approved, third-party verified, built seven years ago and tested now.”
At the crossroads of regulation
At the heart of stablecoin regulation is a key tension between securities regulators and the industry: should digital assets be considered securities or payment instruments?
Treasury Canada is working with the Office of the Superintendent of Financial Institutions and the Bank of Canada to develop federal legislation governing stablecoins. But without clear legislation, the Canadian Securities Administrators (CSA) said in 2023 that stablecoins could represent securities or derivatives.
The crypto community opposed this designation. IN official document Earlier this year, the Canadian Blockchain Consortium, which represents the Canadian crypto industry, argued that stablecoins should be regulated as payment instruments under the Retail Payment Activities Act, “aligning their oversight with their actual function and use.” The GENIUS Act classifies stablecoins as payment instruments.
“We’re really at a crossroads in Canada,” Coinbase’s Fuin said. “Will the federal government find a way to regulate stablecoins in a way more similar to what the US has done, or will we continue down the securities route?”
Fouin explained that Coinbase, which is a member of the Canadian Blockchain Consortium, opposes securities classification because it is a “failed” regulation based on issuer disclosure rather than solvency and capital adequacy. Companies wanting to issue stablecoins in Canada currently must file a prospectus with their securities administrator, essentially agreeing to call the stablecoins a security, Fouin said.
“Regulation does not mean stifling innovation,” Fouin said. “It just has to be well done and well thought out. That's what we're trying to achieve in Canada.”
Image courtesy of Canadian Fintech Forum
