Last week, Circle, the issuer of the U.S. dollar-backed stablecoin USDC, filed an undertaking with Canadian securities regulators, promising that USDC will comply with the regulators’ requirements for so-called Value-Referenced Crypto Assets, or VRCAs.

Circle’s undertaking means that Canadian crypto trading platforms can continue to make USDC available to their clients after December 31, 2024. While the platforms and their clients using USDC are undoubtedly relieved, Canadian stablecoin policy is a mess.

Traditionally, the federal government deals with money and payments, but they haven’t shown much interest in regulating stablecoins. Instead, provincial securities regulators have labelled stablecoins as securities or derivatives and imposed their own requirements. This approach is legally incorrect, undermines innovation and competition in payments, and is inconsistent with the policy approach to stablecoins taken by other major economies.

If there’s any hope of having Canadian stablecoin policy that supports innovation, protects consumers and is aligned with international consensus, the federal government needs to get in the stablecoin game, and provincial securities regulators need to stay out of it.

Stablecoins matter

Stablecoins are a true killer app of crypto. Want to pay anyone in the world, for very low fees, essentially instantaneously? Stablecoins can do that.

Not surprisingly, the use of stablecoins for payments and other transfers of value has grown staggeringly fast. In 2020, there were approximately $5 billion USD worth of fiat-backed stablecoins in circulation. As of December 2024, there is nearly $180 billion USD - an astounding 3,500% growth in four years. In Q2 of 2024, there was reportedly $8.5 trillion USD in stablecoin transaction volume. Stablecoin transactions now account for nearly ⅓ of blockchain transactions.

Given this rapid growth, regulatory guardrails for stablecoins are sensible. Fiat-backed stablecoins hold value in markets only so long as the market is confident that the issuer can and will redeem the stablecoin for money. Issuers can do this only if they have a portfolio of high quality liquid assets somewhere that can be used to meet redemption requests. If confidence is undermined, or if something happens to that portfolio, the stablecoin’s market value may not be so stable, businesses and consumers holding stablecoins may suffer losses, payments may be disrupted and there may be an impact on the broader financial system. These are all good reasons to regulate stablecoin issuers.

Stablecoins are not securities or derivatives

For Canadian securities regulators to have jurisdiction over the distribution or trading of stablecoins, stablecoins must be securities or derivatives. These terms are defined broadly in securities legislation, but this does not mean securities regulators can regulate anything and everything that might cause financial loss to Canadians.

The regulators’ legal theory is that stablecoins are either “evidence of indebtedness”, in which case they are securities, or they are instruments pegged to an underlying currency, in which case they are derivatives.

As a legal theory, this theory is manifestly wrong. For a longer explanation, read the appendix to this industry submission coordinated by the Canadian Web3 Council. The short version is that if stablecoins are securities or derivatives, then so are PayPal accounts, Starbucks cards, and loyalty points programs. A stablecoin is merely an entry in a ledger. When you pay someone using stablecoins, your ledger entry goes down and the recipient’s entry goes up. Functionally, stablecoins are no different from how PayPal, Starbucks and loyalty programs keep ledgers to track transactions by their customers.

It would make no sense to treat peer-to-peer payments, payment cards and loyalty points as securities or derivatives. Securities laws were obviously never intended to regulate the businesses that run these systems because these are payment systems, not investment schemes. As stablecoins are fundamentally payment systems, they too fall outside of securities laws.

Treating stablecoins as securities or derivatives is terrible for innovation

Treating stablecoins as securities or derivatives is a terrible idea if you value greater innovation and competition in Canadian payments. Want to create a CAD stablecoin so that Canadians don’t have to use USD-denominated stablecoins? Want to build payments or remittance services using stablecoins to make it cheaper and faster for Canadians to transfer money to friends and family? Want to enable stablecoin payments for Canadian merchants struggling with high payment processing fees? Want to run a business in Canada exchanging stablecoins for currency? Good luck to you.

The problem is that if you are “in the business of trading” in securities or derivatives, you need to be registered under securities laws. Treating stablecoins as securities or derivatives means that any Canadian business innovating with stablecoins needs to consider registration. Registration is not fast, easy or cheap. Most likely, Canadian payments innovators will have a conversation with securities regulatory counsel, realize that their stablecoin idea requires two years and millions in legal fees to bring to market, and elect to steer clear of stablecoins or build outside of the Canadian market.

The securities regulators’ VRCA requirements do not solve this problem. The Ontario Securities Commission’s website explicitly states that if a VRCA issuer files an undertaking, that does not mean “the issuer or the VRCA is compliant with Canadian securities laws.” Nothing in the securities regulators’ VRCA framework gives any assurance to innovative Canadian businesses that their use of stablecoins will comply with how securities regulators (mistakenly) interpret the law.

The U.S., Europe and Asia are taking a different approach

Recognizing the need to regulate stablecoins in a way that allows adoption and innovation, other jurisdictions have spent considerable time consulting stakeholders or otherwise developing regulatory frameworks in a transparent fashion. The EU has addressed stablecoins in the Markets in Crypto Assets (MiCA) legislation. The New York Department of Financial Services has issued guidance on stablecoins issued by companies subject to NYDFS supervision. Hong Kong, Singapore and the United Kingdom have all consulted on stablecoin regulation and are in the process of introducing regulatory frameworks. The U.S. Congress is widely expected to pass federal stablecoin legislation in the near future.

In all of these jurisdictions, policy-makers and regulators are treating stablecoins like payments and money, not securities or derivatives. Canada stands alone in treating stablecoins as securities or derivatives. Besides creating uncertainty for Canadian consumers and innovators, Canada’s policy approach to stablecoins is completely out of step with the rest of the world’s.

The federal government has slept on the stablecoin file

Canada might not find itself in this situation but for the federal government’s limited interest in stablecoins. Back in late 2022, the federal government did announce consultations on digital currencies, including stablecoins. There were some consultations, but no findings were ever published and no concrete legislative or regulatory action was ever proposed. Since provincial securities regulators were already regulating crypto trading platforms, it’s fair to infer that federal policy-makers and politicians decided to lump stablecoins in with the more volatile aspects of crypto and let the provincial securities regulators deal with it.

Two years later, the federal Department of Finance has quietly re-started consultations on stablecoins, but most likely, it is too little, too late. Now that there is a regulatory approach that some parts of industry have grudgingly accepted (while facing the prospect of an effective ban on stablecoins, mind you), it is hard to see stablecoin policy prioritized at the federal level. And even if it was, there’s little reason to think provinces and their securities regulators will simply give up the jurisdiction those regulators have interpreted for themselves. Instead, in classic Canadian fashion, stablecoins will most likely become a matter of concurrent jurisdiction, with overlapping and potentially contradictory regulatory regimes doing their best to protect Canadians from anything innovative or efficient.

What needs to happen

If the stablecoin situation is to be salvaged, federal policy-makers need to get over their distaste for crypto, accept that stablecoins will just keep getting bigger, a truth that other major jurisdictions have already recognized, and bring stablecoins within payments regulatory schemes that already exist. At the same time, provincial securities regulators need to remember that the securities regulatory perimeter, while expansive, is not unlimited. Only by treating stablecoins for what they are - a way to move around money - will Canada realize their benefits.