Bank of Canada emphasizes need for stablecoin regulation as legislation is tabled

Regulation
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Staffers at the Bank of Canada released an analytic note on fiat-referenced crypto assets, otherwise known as stablecoins, Dec. 19. In addition to a review of mechanisms for creating and distributing stablecoins and a list of the potential risks and benefits they involve, the note expressed the authors’ support for further regulation of the crypto asset.

The global market for fiat-referenced crypto assets increased 30-fold between the beginning of 2020 and mid-2022, reaching $161 billion in U.S. dollars. They are mainly used on crypto-trading platforms, the note states, but they have the potential for a wide variety of other uses, especially in combination with smart contracts.

“These cryptoassets could bring efficiencies and greater competition to payment services, especially in a more digitalized economy. However, without safeguards, they could pose significant risks to the stability of the financial system,” the authors wrote.

The note focuses on concentration among the risks identified. Concentration risk applies to stablecoins themselves as well as holders of stablecoin:

“Currently the top three fiat-referenced cryptoassets have 90% of the total fiat-referenced cryptoasset market; […] Similarly, the top 1% of investors hold approximately 90% or more of the total supply of the major fiat-referenced cryptoassets.”

Such concentration means that impacts on those coins and holders could have outsized impact on the economy as a whole.

Related: Canada bans crypto leverage and margin trading after FTX collapse

Despite guidance from international standards-setting bodies regarding the regulation of fiat-referenced cryptoassets, “most existing regulatory regimes, in Canada and abroad, are not presently fit for purpose,” the note stated. It briefly outlined frameworks and interim measures currently being developed and concluded:

“A timely and comprehensive regulatory approach in Canada will ensure that fiat-referenced cryptoassets can deliver potential benefits without posing unnecessary risks.”

The note was perhaps most interesting in light of the current status of cryptocurrency regulation in Canada. Bill C-249, “Encouraging the Growth of the Cryptoasset Sector Act,” was introduced into the Canadian House of Commons in February. The bill was largely supported by Canada’s crypto community but proved politically divisive and was effectively buried after its second reading.