David Olive is a Toronto-based business columnist for the Star.
Canada is moving with what could be called urgent caution as stablecoin goes mainstream.
Stablecoin is a type of cryptocurrency, or digital dollar, which has stability as perhaps its greatest asset. Bitcoin, Ethereum and other cryptocurrencies are notoriously volatile.
Stablecoin, by contrast, is backed by real assets — cash or high-quality liquid assets — and is pegged one-to-one to a currency or commodity, often the U.S. dollar, the world’s reserve currency.
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An estimated five million Canadians own crypto assets, in a global crypto ecosystem expected to grow to $3.1 trillion by 2030.
Stablecoin is already accepted for payment by merchants served by Ottawa-based Shopify Inc., which processed about $406 billion in merchant payments last year.
Montreal-based National Bank of Canada is getting a head start on its rival Big Six banks in developing a Canadian stablecoin as part of a consortium including Shopify and several financial institutions.
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In the U.S., Visa and PayPal offer stablecoin payment options, and Bank of America, Citigroup and other banks are expected to launch their own stablecoins.
The needed consistency in using stablecoin — that it be recognized across provinces — requires that a national institution rather than varied provincial securities regulators have oversight of the new stablecoin system.
The latest federal budget assigns that responsibility to the Bank of Canada.
Integrating stablecoin into the wider financial system is something of a revolution in cybercurrencies, where regulation has been spotty at best. For most of its 16-year history, crypto has been a Wild West affair.
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Crypto banks and exchanges have routinely failed. And the 2022 collapse of Sam Bankman-Fried’s crypto trading exchange, FTX Trading Ltd., drew global attention to the vulnerability of crypto to fraud.
But stablecoin will be a housebroken crypto, safe to use and worry-free as a store of value. Or it will be, when Canadian legislation for it has been passed and regulations are developed over the coming months.
The banks and financial technology companies (fintechs) that for years have been pushing for that legislation say it will increase economic productivity and competition among financial providers by streamlining financial transactions.
A perfected stablecoin system should make money transfers cheaper by cutting out fee-collecting third parties in domestic and cross-border transactions.
Ottawa agrees, and so does the European Union (EU), which has created a set of rules and regulations for stablecoin.
Tiff Macklem, governor of the BoC, is determined that stablecoin, as it goes mainstream, have all the volatility associated with crypto drained out of it.
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“We want to make sure that there’s enough operational resilience, so that this thing functions 24/7,” Macklem told a Senate committee hearing on Nov. 6.
And for Macklem, stability means the new digital asset class will always be convertible to real-world money at par. “As soon as there’s questions about whether that will happen, you will get a run on the stablecoin, and the stablecoin very rapidly becomes unstable,” Macklem said.
Ottawa proposes that the BoC maintain a public registry of stablecoin issuers.
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Issuers must maintain real-world reserves in a segregated account, or trust, with a qualified financial institution separate from the issuer. That would guard against losses of customers’ stablecoin holdings in the event of an issuers’ insolvency.
That’s the cautious element in this milestone in crypto’s evolution.
The urgent part is that the U.S. passed legislation earlier this year, called the GENIUS Act, that creates a framework for regulating stablecoins in the U.S.
That has accelerated the development of Canadian stablecoins. Otherwise, “people would basically use stablecoins denominated in U.S. dollars,” said François-Philippe Champagne, the federal finance minister.
And that could diminish the BoC’s control of the money supply that enables it to make monetary policy. Thus, the central bank’s role in setting stablecoin regulations and overseeing this new class of digital currency comes naturally.
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It might be that the advent of stablecoin has been inevitable since the global financial system began moving toward a cashless society decades ago.
But agreement on how to develop, legislate and regulate stablecoin still hasn’t been confirmed. The Carney government is intent on speeding that process along.
And it is tying the emergence of stablecoin to “open banking,” a new system that promises to ease consumers’ transfer of financial data among financial institutions and merchants.
Carney’s budget assigns development and oversight of open banking to the Bank of Canada, as well.
The BoC already oversees about 1,500 companies providing online payment services, including digital wallets.
And the U.S.’s first-mover status should benefit Canada. The GENIUS Act has already come under fire for its regulatory shortcomings. And U.S. stablecoins will be overseen, as U.S. banks are, by more than 50 federal and state regulators, a system rife with loopholes.
The Canadian approach of just one powerful regulator, the Bank of Canada, is better suited to guarding against mismanagement, fraud and scams. And the Canadian financial system will have time in observing the U.S. stablecoin rollout to identify its flaws and develop the world’s safest model.
