A few days ago I published a critique on the proposed stablecoin law in Canada. Step 1 of any problem solving method is to check whether there is a problem. But the next step is to ask, what would address the problem? What's missing from the proposed Stablecoin Act?

An easier question than what exactly is missing, because that answer depends on political views, is to put forward the principles that ought to be looked to.

Principle #1: The World Is The Market

Long-time readers of my blog won't be surprised to learn that I view the global stablecoin market as the relevant one, not the local market of Canada. Any law about stablecoins should be attempting to build world class stablecoin issuers in Canada that serve the rest of the world, not merely the local (small) market. USDT and USDC represent more than $200 billion Canadian Dollars right now (denominated of course in USD, because they're foreign stablecoins.) Virtually none of those assets are held in Canada.

What would enable a global stablecoin business? Stay tuned for my next post.

Principle #2: Canadians Aren't The Problem

Currently, foreign stablecoin issuers are ~100% of the market for stablecoins in Canada. It is these foreign stablecoins that pose a risk, not local products. Not now, and at no point in the future, will Canadian stablecoin issuers be the biggest threat to Canadians. The problem is always foreign creators of stablecoins, who will never respect any law passed in Canada. The proposed law just won't stop them, affect them, or do anything to change their risk management practices. Accordingly, the law is really domestic regulation of domestic stablecoins, and leaves open a huge gap for foreign players.

A proper stablecoin law would think about the risk of foreign stablecoins, not the risk of local companies. Local companies can be sued and pursued for fraud, bankruptcy, etc. Foreign offshore stablecoin issuers are essentially immune to local process and control (and are structured to do that.) With few control points in Canada, foreign stablecoin creators simply don't have to pay attention to what happens here. So the question is: how do you get control of foreign issuers? Or, alternatively, how do you help local ones to be better? (Rather than mistrusting them from the get-go.)

Principle #3: Don't Assume The Proper Regulatory System Is Known

This is an early market. Stablecoins are big globally, but dwarfed by other kinds of money. And domestically? Virtually zero. In the early days of any market, the market regulator should not purport to know the future. It is a certainty that things will change, and that the best system isn't known yet. Having the statute contain significant rules about things, such as in the proposed bill the idea of having a lawyer write a public opinion about whether the stablecoin will meet the requirements, is premature. The details should be left to regulation and the regulator's rules. This is the most common arrangement in modern laws.

I have a lot of sympathy for the idea that the statute should contain the necessary rules, because that's how laws should work, but when the regulator wants to take on the role of second-guessing the managers of complex financial-technical-legal products, there ought to be some humility.

Principle #4: Enable Stablecoins

The proposed law views stablecoins more as a threat than an opportunity. But the threat is already here: USDC and USDT are enormous and widely used by Canadians involved in crypto. Many crypto businesses operate entirely with USDC payments, right now. The goal should be to bring the benefits of stablecoins to more people, and to enable the creation of stablecoins, not hobble them. Yes, regulation requires hobbling (it's kind of the point), but it can also enable.

Principle #5: Oppose Provincial Securities Classification

It's not true that stablecoins are securities. There, I said it. The VRCA staff notices that have been issued by provincial securities regulators aren't correct, and they're out of step with the rest of the world. Securities regulators extended too far in claiming that stablecoins are securities. Although I actually agree with the technical wording of the VRCA guidance, which says that a stablecoin may be a security. That's true. But stablecoins, properly made, are not securities, and the provincial regulators' language has muddied the waters significantly.

A good stablecoin act would oppose the provincial government's takeover of a field they should not be regulating. Many commentators have noted that the proposed federal Stablecoin Act has to stay in the federal lane, which is true, by not interfering with the provincial system, which is not quite true. If stablecoins aren't securities, there's no danger in the federal government taking over the field. And isn't that proper? Stablecoins are far more like a payments system or a banking system than they are a security, since they have no prospect for making a return and no one with any sense would hold a stablecoin as an investment.

Principle #6: Interest To The Public

An ideal stablecoin law would permit paying interest to the public because that's what maximizes consumer welfare. If stablecoin issuers want to do that, then the public will benefit. And over time, with many stablecoin issuers competing, this will result in the most efficient system because the vast majority of the potential profits will end up in the hands of users. This is also a competitive edge over the existing stablecoin systems. Rather than ruling out interest by statute, why not enable it? Why not let Canadians benefit from stablecoins?

Principle #7: Maximum Safety

The safest way to store money is with the Bank of Canada because it's the federal government. The ideal stablecoin system, in my view, would hold its assets at the most guaranteed place: the federal government. Why not allow accounts for stablecoin issuers, which are purely for storing financial assets, and then the Bank of Canada can keep a very close eye on the reserves? Why involve trust companies and other complex arrangements? The government has the ability to bank the stablecoin issuers directly, just like large banks do in other ways, and it can pay the interest on the money. Then the Bank of Canada can do what it will with the money (e.g. short term Canadian government bonds), and the stablecoin issuers can know that their money is ultimately secure, and they automatically get the interest paid. This would make it much easier to start a stablecoin, and more secure for the public that uses them.

Principle #8: A Stablecoin For Stablecoins

Why not go further with this? Have the Bank of Canada make its own stablecoin that purely tracks the money movements into the reserve accounts with the Bank of Canada? A private stablecoin system that's publicly viewable, on-chain, so that everyone can see how much the stablecoin issuer has. Then the issuers make their own stablecoins based off those reserves. This would foster a competitive market and cut down on costs. It greatly simplifies the supervisory system, because the government will have literal control of the funds. And users will be able to spot if there's a discrepancy between issued tokens on-chain and Bank of Canada reserves on-chain.

If the Bank of Canada is unable to make a basic stablecoin system to track their own money then they're probably not fit to be a regulator of stablecoins. So this is also a test of their capabilities, and the capabilities of Canadian industry that would support this. Once built, this would also be an export product for the Bank of Canada, because it could license the system to other central banks that want to do the same thing, like how the government prints physical money for other countries.