Canada’s stablecoin regulation push
Canada is moving forward with plans to regulate stablecoins, but according to Scotiabank, this regulatory effort probably won’t have much effect on domestic markets. The bank’s economist Derek Holt wrote in a recent report that any framework Canada develops would mainly focus on improving payment speed, efficiency, and enabling 24/7 settlement. It’s not really about managing systemic risk, at least not yet.
Back in November, the Canadian government committed to legislation that would regulate stablecoins backed by the Canadian dollar. This follows similar moves in the United States, which passed its own stablecoin legislation in recent months. It’s interesting to see how different countries are approaching this, though I think Canada might be taking a more cautious path.
What stablecoins actually do
Stablecoins are cryptocurrencies pegged to other assets, usually fiat currencies like the US dollar or Canadian dollar, though sometimes to gold or other commodities. They’ve become pretty important in crypto markets, serving as a payment infrastructure and a way to move money internationally. Tether’s USDT is the biggest player here, with about $185 billion in circulation, followed by Circle’s USDC.
What’s worth noting is how these stablecoin issuers manage their reserves. They mostly park them in short-term Treasuries, repo agreements, and money-market funds. Some have started adding bitcoin and gold to the mix, which has raised concerns. If there were a run on a stablecoin, it could force asset liquidations, and that’s where things might get messy.
The stability question
S&P recently downgraded its assessment of Tether’s ability to maintain its peg to the lowest level on its scale. Circle’s peg looks more stable, perhaps because it focuses more tightly on Treasury holdings. Without access to Federal Reserve backstops, these issuers would have limited defenses during a stress event, as Holt pointed out.
But here’s the thing—this probably isn’t a repeat of historic peg failures. Stablecoins are still a relatively small part of global finance, even though some projections imagine trillion-dollar reserve pools that could eventually matter for Treasury markets. US officials say stablecoins help extend the dollar’s reach, but Holt cautioned that fiscal slippage or issuer-level imbalances could make that support fragile.
Canada’s potential benefits
For Canada, Scotiabank sees the real value in cross-border payments. Stablecoins could potentially cut costs, narrow liquidity premiums, and offer round-the-clock settlement. That’s provided the issuers remain solid, of course. It’s a practical application that makes sense for a country with significant international trade.
I’m curious how this will play out. The regulatory approach seems sensible, focusing on payment improvements rather than trying to manage risks that might not even exist yet in Canada’s market. But regulations always have unintended consequences, and I wonder if this might stifle innovation or push activity elsewhere.
What’s clear is that stablecoins are becoming part of the financial landscape, whether traditional banks like it or not. Canada’s move to regulate them seems like a recognition of that reality, even if the immediate market impact might be limited.
