Canada lags behind as world leaders move towards stablecoin

In May 2023, there was a buzz when the Bank of Canada announced its intention to research the use of central bank digital currency (CBDC). However, no supplementary news on the digital dollar has emerged from the country's central bank in the years that have followed.

What has gained continuous traction is the rise of stablecoins on the Canadian market. These digital currencies are tied to commodities like gold or a state currency. For example, the USD-pegged Tether fluctuates in value in tandem with the physical US dollar. Tether is the largest traded stablecoin with a USD $164 billion market cap. That is comparable to Sony Group's dominance with USD $165 billion.

As companies begin to integrate stablecoin capabilities into their platforms, such as Visa's recent launch of PayPal USD coin, national governments are introducing legislation to facilitate the establishment of stablecoins as a regulated asset.

Last month, US President Donald Trump signed the Guaranteeing Essential National Infrastructure in US-Stablecoins (GENIUS) Act. This legislation establishes the legal framework for the use of this financial method, requiring banks to maintain a one-to-one ratio of cash to any stablecoin issued through the institution and ensuring that all stablecoin issuers comply with the country's Bank Secrecy Act.

"With this bill, it joins a growing list of countries seeking to bring oversight and stability to the rapidly expanding digital asset ecosystem. This act aims to provide clear regulatory guardrails for the industry," stated a World Economic Forum analysis on the act.

American banks, big and small, are now planning the launch of USD-backed coins for transactional use. Here in Canada, they are categorised differently. Its classification is what experts say is impeding its growth as an alternate currency.

"They're meant to operate like digital cash: a way to move money, not an investment product," says Lucas Matheson, CEO of Coinbase Canada. His company has spent the last three years working directly with Canadian lawmakers, advocating for stablecoins to be categorised as money instead of securities.

"The goal is to ensure stablecoins are treated according to how they're actually used: as a way to pay, not as speculative assets," says Matheson. "As the country heads into a new political chapter, it's critical that Prime Minister Mark Carney and our new government engages with our industry, and collaborates with us to ensure we have clear competitive rules that foster innovation and economic growth."

Anwar Sheluchin is the founder of the cryptocurrency politics database cryptocommons.ca, as well as a PhD candidate in political science specialising in comparative public policy and digital currency. For her site, she has collected hundreds of articles and statements from elected officials to determine their position on cryptocurrency. This includes links to instances such as when Conservative Party leader Pierre Poilievre used Bitcoin to purchase a Shawarma in 2022. It also includes staunch opposition from many Liberals and NDPs.

"As other nations move ahead with comprehensive legislation, the gaps will continue to grow...In Canada, digital currencies are regulated through a patchwork of securities laws (securities are the responsibility of the provinces/territories, not the federal government). I think this has caused some tension with the industry, primarily with the rise of stablecoins," says Sheluchin.

There are some concerns around the widespread implementation of stablecoins. The Bank of International Settlements released its annual report in June. The financial stability advocacy firms stated that "loss of monetary sovereignty and capital flight are major concerns, particularly for emerging market and developing economies. If stablecoins continue to grow, they could pose financial stability risks." It also outlined the risks associated with stablecoin usage in relation to financial crime.

Sheluchin says the perception of crypto as an easy cover for criminal activity is a slight misconception. "Many people think Bitcoin or Ethereum transactions are completely anonymous, which leads to the idea that only criminals or shadowy figures use crypto, but in reality, most crypto operates on public blockchains that are highly traceable," she says. "There are, of course, nuances and other use cases (cross-border payments, tokenized assets, DeFi, governance protocols), but this nuance is missing in mainstream conversations."

In fact, Canadian law enforcement officials have used blockchain analytics to conduct investigations, such as when the OPP used Chainalysis' technology to track wallet ownership on the blockchain and recover USD $74 million in partnership with US enforcement.

But Canada has slowed its edge as a cryptocurrency innovator.

"Canada was a leader in digital assets - home to Ethereum and the world's first Bitcoin ETF. Today, we still do not have a path for a Canadian issuer to introduce a stablecoin to market, as a result - we have no regulated Canadian stablecoin," says Matheson.

A report from the Standing Committee on Industry and Technology in 2023 outlined establishing "a national blockchain strategy that clarifies the government's policy direction and regulatory approach, and demonstrates support for the industry." Still, according to Sheluchin, there has been no outcome from the released report.

As more Canadians become exposed to cryptocurrency, more politicians will use the conversation as a means to gain voters. Sheluchin will be looking to see how new frameworks and standards will shift public perception. "Pierre Poilievre's embracing of Bitcoin was used a political jab to doubt his credibility, but it's possible those tactics won't work as more Canadians are exposed to crypto."

For Matheson, shifting stablecoin frameworks in this country will enable an already crypto-curious nation to use the currency to its full potential.

"Five million Canadians already hold crypto, and 86% say the financial system needs an update. Nearly one in three would be more likely to buy crypto if the industry were better regulated."