Next week’s federal budget purportedly contains updates that FinTech leaders in Canada have been calling for: movement on an open banking framework and “language” around stablecoins.
“Regulation does not mean crippling innovation. It just needs to be well done and well thought out. That’s what we’re trying to get in Canada.”
Regardless of whether stablecoins are referenced 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.
According to venture capital (VC) firm Andreessen Horowitz, stablecoin transaction volume tripled that of Visa over the past year to reach $46 trillion USD, and it’s on track to eat up more of the market.
A stablecoin is a cryptocurrency pegged to another reserve asset, typically a currency like the United States dollar. When a consumer purchases a digital token, the issuer is presumably guaranteeing that it has the equivalent cash in reserves. The digital asset promises speed and facility compared to traditional wire transfer systems, which are subject to intermediary fees and limited by hours of operation.
At Canada Fintech Forum in Montréal, Luge Capital partner Karim Gillani made a compelling case for the stablecoin as a faster, less expensive, and easier cross-border payment method.
“This isn’t just some theoretical science fair project,” Gillani said. “This is happening right now.”
Laure Fouin, Coinbase Canada’s associate general counsel, told BetaKit that stablecoins are a way to “bring the crypto promise” to Canadians. She claimed that the low fees and instant transfer can particularly help newcomers to Canada send money to family abroad.
Canada’s FinTech and crypto leaders are banging the drum that Canada will be left in the economic dust if the feds don’t move quickly on regulating stablecoins. The vast majority of stablecoins in circulation are backed to the US dollar, like USDC. The US also recently passed the GENIUS Act, which regulates what entities can issue stablecoins and how much money they need to have in reserve. Tech leaders have argued that legislation is necessary to avoid Canada “falling behind” and retaining control over its payment infrastructure.
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The industry is moving quickly to keep pace. JPMorgan has launched a stablecoin-like asset in the US, while PayPal and Visa now offer stablecoin payment options. Canada’s most valuable tech company, Shopify, now supports payments to merchants through USDC, in partnership with Stripe and Coinbase.
In line with the industry push, bank leaders and regulators have shown interest in a Canadian stablecoin framework ahead of the federal budget. Ron Morrow, the central bank’s executive director of payments, said that Canada is behind other countries in developing rules for the use of stablecoins. Superintendent of financial institutions Peter Routledge praised bipartisan support for the GENIUS Act, and called some parts of it “innovative and cool,” The Logic reported.
The concern, as with many decentralized finance methods, is that widespread use of stablecoin could create cover for criminal behaviour. According to a report by Chainalysis, which sells software for crypto company compliance, stablecoins now account for 63 percent of illicit transactions on the blockchain, like money transfers to sanctioned entities. The International Compliance Association said in a report that people doing financial crime look to stablecoins for the same reasons a consumer might—speedier transactions and fewer fees.
Hubert Pun, PhD program director at Western University’s Ivey Business School, thinks the GENIUS Act is a “sensible policy to copy” as Canada pursues legal infrastructure for the stablecoin.
“That will minimize a lot of illegal activity,” Pun said. “If you let a company issue a stablecoin without [the] government involved, people are greedy and they may do something shady.”
With rising usage, banks could feel a hit to their deposit base. A potential $1 trillion USD could flow out of banks in emerging markets into stablecoin wallets, according to developing economy bank Standard Chartered. Pun acknowledged that banks may be wary of consumers diverting assets away from their accounts as stablecoin usage grows, but the onus is on them to keep pace with new financial technology. According to Cybrid CEO Avinash Chidambaram, all of Canada’s big banks “either have a stablecoin strategy or are working on one.”
“If they’re not willing to innovate, then they’re disrupted,” Pun said. “As a customer or a Canadian citizen, I’d just like to have the most effective and low-cost payment infrastructure.”
The case for a Canadian stablecoin
While stablecoins are so-called “stable” because they typically have less volatility than other digital currencies like bitcoin, stablecoins have previously lost their pegged value. Tether, which issued an algorithmic stablecoin called Terra, lost roughly $60 billion in value in May 2022, helping accelerate a crypto winter of high-profile, unregulated exchange collapses that hit retail investors hard.
Crypto crashes like this are part of why the Canadian crypto industry is calling for a regulatory framework to govern stablecoins in Canada. Industry leaders say Canada will be left at the mercy of a US-dominated payment system without a strategy. Ninety-nine percent of stablecoins are pegged to the US dollar in the global market, according to JPMorgan.
“As a customer or a Canadian citizen, I’d just like to have the most effective and low-cost payment infrastructure.”
John Ruffolo, Maverix Private Equity co-founder and managing partner, argued earlier this month in the Financial Post that a stablecoin strategy is necessary for Canada to maintain its economic sovereignty. If people started moving money into US dollar-backed stablecoin wallets, he said, it could increase government borrowing costs, take away the central bank’s control, and give American regulators more power over Canadian companies.
“If even five percent of Canadian deposits — $135 billion — migrated into US stablecoins, the knock-on effects of our fractional reserve system could conservatively erase as much as $675 billion in domestic lending capacity,” Ruffolo wrote.
Multiple Canadian companies are pursuing a Canadian dollar-backed stablecoin, though a lack of regulation puts them in a grey area for market strategy.
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Toronto’s Stablecorp has been developing its Canadian-denominated QCAD stablecoin, 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 spinoff of Paytrie, recently raised $3 million to launch a regulated CAD-backed stablecoin. It claims its CADC stablecoin is the leading CAD-backed stablecoin in Canada. Loon said it pre-filed a prospectus with the Alberta Securities Commission to get closer to regulatory approval.
Tetra Trust, backed by National Bank and other FinTech leaders, has formed a new parent company (Tetra Digital Group) that has closed $10-million CAD in funding to launch a Canadian-dollar stablecoin, fully backed by fiat reserves. In 2021, Tetra Trust became Canada’s first regulated crypto custodian after receiving approval as a licensed trust company in Alberta, and hopes to use that status to avoid filing a prospectus for an eventual stablecoin.
Then there’s VersaBank, a London, Ont.-based Schedule I chartered bank, taking a different approach to the digital asset. VersaBank has started issuing digital deposit receipts called Real Bank Deposit Tokens, a product that it claims is a superior and more secure version of the “so-called stablecoin.”
David Taylor, VersaBank’s founder and CEO, told BetaKit in an interview that Ottawa is “feeling the heat” to enact something similar to the GENIUS Act. “My view is, no, it shouldn’t,” Taylor said. “You already have a bank in Canada with the technology well developed, signed off, third party reviewed, built seven years ago and tested now.”
At the “crossroads” of regulation
At the heart of regulating stablecoins is a key tension between securities regulators and industry: should the digital assets be considered securities or payment instruments?
Canada’s Department of Finance has been working with the Office of the Superintendent of Financial Institutions and Bank of Canada to develop federal legislation to govern stablecoins. But without clear legislation, the Canadian Securities Administrators (CSA) said in 2023 that stablecoins may constitute securities or derivatives.
The crypto community has balked at this designation. In a white paper 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 actual function and use.” The GENIUS Act classifies stablecoins as payment instruments.
“In Canada, we’re really at the crossroads,” Coinbase’s Fouin said. “Will the federal government find a way for stablecoin to be regulated in a manner more similar to what the US has done, or do we keep on going the securities route?”
Fouin explained that Coinbase, which is a Canadian Blockchain Consortium member, is opposing the securities characterization because this “unfortunate” regulation is based on disclosure by the issuer, rather than on solvency and capital adequacy. According to Fouin, companies looking to issue stablecoins in Canada currently must file a prospectus with its securities administrator, in essence agreeing to call stablecoins securities.
“Regulation does not mean crippling innovation,” Fouin said. “It just needs to be well done and well thought out. That’s what we’re trying to get in Canada.”
Feature image courtesy Canada Fintech Forum