Canada is moving forward with its efforts to regulate stablecoins, having put it on the docket for a policy update anticipated in next month’s federal budget.
Finance Minister François-Philippe Champagne is set to unveil a framework targeting the expanding influence of stablecoins, a move driven by fears that Canada could lag behind other countries in regulating this fast-growing sector.
Stablecoins are digital currencies pegged to traditional assets like the U.S. dollar, designed to maintain price stability. They are commonly issued by private companies such as Tether Holdings SA and Circle Internet Group Inc. (NASDAQ: CRCL), and are often backed by assets including U.S. Treasury bills.
In Canada, the lack of a comprehensive legal framework has led regulators to classify stablecoins as securities or derivatives.
John Ruffolo, founder of Maverix Private Equity and vice chair of the Council of Canadian Innovators, has urged the government to act swiftly. He cautioned that without clear regulations, Canadian capital could shift toward U.S. dollar-backed stablecoins, potentially affecting demand for domestic financial instruments and limiting the Bank of Canada’s influence over monetary policy. He also noted that Canadian financial data could end up governed by foreign regulations.
Recent U.S. legislation is accelerating the push for regulation, creating clear rules for stablecoin reserve management and anti-money laundering compliance. The crypto industry has largely welcomed the move, seeing it as a major step toward mainstream adoption and greater market legitimacy.
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Stablecoins raise several concerns
The Bank of Canada has also introduced its concerns over the lack of stablecoin regulation. Ron Morrow, the Bank’s executive director of payments, supervision, and oversight, said federal oversight could help modernize payment systems and support financial stability.
Industry stakeholders and policymakers are watching to see how the country positions itself in the evolving global digital finance landscape.
Stablecoins raise several concerns. A primary issue is their vulnerability to “runs,” where mass redemptions can destabilize the system. For instance, the collapse of the TerraUSD algorithmic stablecoin in 2022 showing the risks of unstable reserve mechanisms. Even asset-backed stablecoins can face liquidity strains during market stress, as seen in the 2023 USDC de-pegging.
Additionally, the lack of transparency in reserve holdings poses risks. Tether (USDT), the largest stablecoin by market cap, has faced repeated scrutiny over its reserve audits. Investigations revealed that a portion of its backing includes commercial paper and short-term debt rather than cash or government securities. Critics also warn that insufficient disclosure undermines investor confidence and could amplify systemic risk if confidence falters.
Regulatory gaps further exacerbate these issues. The Bank of Canada has called for federal oversight, citing concerns over systemic risk, economic stability, and consumer protection.
