Canada is (probably) getting a new federal law about stablecoins: the Stablecoin Act, introduced as part of the recent omnibus budget bill. This is an interesting moment for me, as I was the general counsel for Canada Stablecorp when they first were getting off the ground six years ago with what's now the first (and only) approved stablecoin in Canada: QCAD. But wait, how can QCAD be approved when the Stablecoin Act hasn't been passed yet? Read on to learn more about how the current system works, what the new law proposes to do, and the surprising lack of explanation from Parliament as to what this law is for.

Before going further with this blog post, I should say that I haven't worked on QCAD for many years, and their success is the product of many people working for many years, including a number of other lawyers, and what I write here doesn't reflect their views or any of my other clients.

Hello New Legislation

The proposed law was greeted on LinkedIn and Twitter with many cheery posts. Canadians love new laws, and many people hold the belief that if only a few more laws could be passed, utopia will be at hand. Or at least, a better situation... But in order for that to be the case, the law has to fix something, and it has to fix something pretty important with Canadian stablecoins because the current market is small relative to the USD stablecoins issued and managed beyond Canada's borders. So what's the current problem this law fixes, and how does it make stablecoins better?

The CEO of the Canadian subsidiary of US crypto giant Coinbase wrote in Macleans that the new law could make stablecoins that are a godsend if trade disputes with America continue. The article doesn't quite explain how, but there's broad agreement in the that stablecoins are here to stay, they're useful, and having good quality stablecoins for each fiat currency makes life easier. That said, what's the connection between the law and improvement in Canadian Dollar stablecoins?

A recent paper by academics at U of T, Stanford, and York has a less rosy view of the law than Coinbase Canada:

Overall, the Stablecoin Act is likely to increase regulatory uncertainty because of its overlapping assignment of responsibilities and several unresolved issues related to protection of privacy and compliance with rules governing anti-money laundering (AML) and countering the financing of terrorism (CFT). Further, the Act's provisions covering the safety and liquidity of the reserve assets backing stablecoins are insufficient to protect users and support financial stability. Finally, the Act risks over-extending the mandate of the Bank of Canada (BoC).

Why Did The Government Create This Law?

There's been essentially no discussion of this law in the House of Commons (Hansard). One MP from Saskatchewan asked why this isn't a separate law but had no comment on the substance of it. Another Conservative MP criticized the law as a "flip flop" but also didn't say anything about the merit of it. There's no rationale for it that's been discussed in the Senate either. This law is one of many packaged into a huge omnibus budget act that is 601 pages long. The Stablecoin Act appears to be an after thought, rather than a core piece of legislation for this government.

Parliamentary speeches aren't helpful in knowing why this law is on the table but it's fairly safe to say it is inspired/motivated by the GENIUS Act in the United States. But that doesn't really help to understand the substance of this law, which is not just a copy of the American legislation or an attempt to harmonze with the US. The law lacks a preamble (unlike the law directly preceding it in the budget bill), so there's not even a suggestion in the law about what it's supposed to do.

Adding further mystery to the law: there's already a comprehensive provincial securities regulatory regime that applies to stablecoins.

What Problem Does The Law Solve?

My guesses about what the authors of this bill think it will do:

1. Provide regulatory certainty which will enable regulated players to know what is ok and what is not

2. Boost the prosperity of Canada by preventing the use of stablecoins from other countries

3. Reduce the risk of loss for people holding stablecoins

4. Add a new control point to stablecoins, at the Bank of Canada, in order to enact further government policy

5. Help banks to make stablecoins and/or use them

6. Impose new requirements on stablecoin issuers that provincial law doesn't

7. Increase the quantity of dollars held within Canada's borders

Analysing The Act

What's likely to happen if this law is passed? Below are some points for discussion.

1. Regulatory Certainty: Decreased

This law reduces regulatory certainty because there's already a province-level regime. Now there's a new federal scheme for people to figure out, and new requirements that aren't the same as the provincial ones. Dual federal and provincial regulation is a recipe for higher costs, and greater uncertainty about exactly what rules apply. The Bank of Canada's rollout of the RPAA does not instill much faith that this will be a smooth ride, although eventually every new regulatory scheme can be accounted for. That said, this new bill will decrease certainty in the short term, and that matters because the short term is where a CAD stablecoin will be made. If there's to be a giant in the world of stablecoins that uses the Canadian Dollar, now is the right time for it to start.

2. Boosting Prosperity?

It's unlikely that a new expensive legal regime will boost Canadian prosperity overall.

For one, people may just not use these stablecoins (or maybe none will be issued under this framework) because they have excellent options in the form of USDC (and other international options). Most crypto use cases are international, so a USD-denominated stablecoin makes sense for most applications in the short term. For the new framework to succeed, it'll have to dramatically boost the quantity of stablecoins issued in relation to the Canadian Dollar, but the law is almost entirely costs and penalties, with almost nothing given to stablecoin issuers. There's a limited carveout under federal financial laws, but this doesn't help very much.

There's a lot of missing pieces between this law and increased prosperity. And to the extent that foreign stablecoins are eliminated from the market, that phenomenon will probably not be that strong because users want to do useful things, and the most useful stablecoins are the ones you can use globally, which is USD-denominated stablecoins. Boosting prosperity by blocking foreign competition is a classic regulatory strategy, but it's one that belongs in the old world, not the new digital world where controls are easily circumvented or bypassed entirely. In reality, if USDC (or whatever competitor appears) isn't available on regulated Canadian platforms this will only hurt customers. The way to succeed in the global world is to have a good product, not to outlaw competitors, and in any case, this law doesn't ban USD-denominated stablecoins or foreign issusers.

3. Reducing Risk Of Loss

It's certainly possible that new rules will make bankruptcies less likely, but it would have to go beyond the protections that provincial securities regulators have already decided on. Is that the case here? And if so, by how much?

Even if losses to consumers are reduced by some small amount through some means, what is the cost of having fewer options in the market? The safety of cars could be reduced by outlawing all but the safest one, but the result would be unusually high prices and worsened consumer welfare. The same is true in other markets, even while it's less obvious to people why it matters to have choices when it comes to stablecoins.

4. The Advantage To Government

Having a federal regulator of stablecoins (the Bank of Canada) is obviously attractive to the federal government, but control purely for the sake of control is not useful to anyone else. Creating new regulatory agencies (or adding new responsibilities to existing ones, which is a similar exercise) doesn't neccessarily lead to better outcomes, and in this case there's already provincial regulators doing this, who have had years to build up their expertise in the area of crypto regulation.

5. Bank Stablecoins

Canadian banks are very successful. They don't really need more help from the federal government, and they could create stablecoins today just like JPM has done in the US pre-Genius Act. As a regulatory reform that benefits banks, this law may be useful, but to the extent it has other costs, that takes away from the overall benefit to Canadians.

6. The Cost: Very High Relative To Market Size

The truth of stablecoins is that they're only a good business when there's a very large amount of money in them. Small scale stablecoins have high costs and low profit, because there's a linear relationship between the quantity of stablecoins issued and the income from them, but the costs are relatively fixed.

The Bank of Canada will be tasked with running the new stablecoin licensing scheme. This will reportedly cost $5m/yr to start but the government hopes to reduce the spend by imposing fees on the stablecoin issuers. This is a direct financial cost for stablecoin issuers, and given the restrictions on what they can hold in their reserves, creates a minimum financial hurdle for stablecoins. If we assume there'll only be three stablecoins issued under this framework (which is probably a realistic guess), and the cost is twice as high as the government estimates (also a realistic guess), there'll be some $3m/yr in additional burden on issuers.

At a current interest rate of 2.3% (close to the federal bond rate), this requires about $100m in cash to pay for. The chance that stablecoin issuers will be able to spin up that amount of deposits over the next couple years is very unlikely. If these estimates seem pessimistic, consider that they don't include legal costs, personnel costs, etc.

7. Increasing Dollars Held In Canada

Although it's possible, this law probably will have a miniscule effect on this, and if it harms the existing market, it could reduce CAD holdings in stablecoins.

Anti-Stablecoin Act?

It's going a bit far to call this the Anti-Stablecoin Act but it's hard to see how this law will not be a negative to stablecoin issuers, at least in the short run. Had anyone asked me, I could have suggested a number of ways to help stablecoin issuers, and in legislative form it would not have looked like this bill.

Is This Necessary?

The provinces have already regulated stablecoins under existing securities laws. To the extent that federal reform was needed to make stablecoins fit better into the payments landscape (re: RPAA), a more tailored law could easily have been developed. Instead, this law appears to position the Bank of Canada as a primary regulator of stablecoins, a mandate that it will find challenging to fulfill because it requires building up substantial expertise in the field of stablecoins. That expertise is neither free, not particularly likely to work for the Bank of Canada when there's so much opportunity internationally, so there'll be a struggle to find well-qualified people to lead these efforts.

Taking On The Provinces

I do not think this law was intended to displace the existing regulatory efforts of the provinces. It's fun to imagine that the authors of this bill had in mind the argument that provincial securities regulators can't regulate stablecoins because they're not securities (and thus, the provincial rules aren't enforceable or a correct legal regime). But no, that's almost certainly not what they had in mind, however much that might put the Bank of Canada into the driver's seat for stablecoins. In an alternate world, this would have maybe made sense, and provided a single regulator rather than many provincial ones. And since stablecoins have important applications, it would fit within the same general idea as the RPAA. But that isn't the world we're in, and instead this creates duplication. That's not a unique problem for this law, but it's an especially bad problem because there isn't a highly successful Canadian Dollar stablecoin as there is for the United States Dollar (i.e. USDC).

This bill appears to be putting the cart before the horse by creating laws to regulate a nascent business before it's been proven that there's enormous demand, the level of demand that would justify a significant new piece of regulation.

Legal Details

There are a number of unusual provisions in this bill, most of which have been commented on by other lawyers or academics. Below are a few detailed points about the actual text of the law.

A. Closed Loop Stablecoins?

Here's a new idea in section 11! What's a closed loop stablecoin? Nobody knows. A closed loop gift card is one that can only be used with a certain store, so presumably the drafter had in mind the idea that a token could be worth $1 at a certain store. Maybe they didn't want to accidentally regulate gift cards? Maybe they want companies to have their own private stablecoins a la JPM Coin (before it expanded to its current incarnation)? Although it's unclear what this is supposed to do, it's maybe not a bad idea to try to exclude stablecoins that have a purely private purpose. On the other hand, those haven't been very useful and I'm not aware of any that exist in Canada so this seems like a rule that may not apply to anything at all.

B. Excluding The Bank Of Canada

Section 13 excludes the application of the law to the Bank of Canada, which is also set as the regulator of stablecoins. This keeps the door open for a CBDC issued by the Bank of Canada. But it's not a good idea to have a regulator that also competes with the companies it regulates. This law could be used down the line to impose significant restrictions on stablecoins in order to improve the fortunes of the Bank of Canada's own proprietary stablecoin. It's not good form to be the regulator of your competition, because it creates the potential for conflicts.

C. Lawyer Certificates

Section 17(2)(f) is an odd rule that requires applicants to produce a statement from a lawyer of whether, in the lawyer’s opinion, the measures referred to in paragraph (e) enable the applicant to comply with sections 38 and 39. This is not the proper role of lawyers. It is not for private lawyers to tell the federal government that they think that their client's measures will be effective. That's the job of the regulator! Lawyers shouldn't be issuing certificates like this on principle because it's a change in the role of lawyers from advisors/advocates to certifiers. A lawyer's opinion should only matter to their client, not to the regulator. Furthermore, the next clause states that the lawyers must be independent of the client, so this means getting a third-party lawyer to provide a certificate essentially approving of the company's work. This is muddling the role of lawyers.

D. No Interest

A stablecoin can't pay interest to the holders of the stablecoin. This is against the consumer's interest because it means the company doesn't share any profits with the people who make those profits (by holding the stablecoin). This has generally been the pattern of stablecoins anyway, because that helps with the argument that it isn't a security, but if there's a new legal regime being invented, why not give something back to the consumer?

I can think of at least two good reasons for this rule: 1) to reduce insolvency risk 2) to prevent competition for the banks.

E. Blocking Courts & Access To Information

Section 56 has a number of rules intended to limit the public's access to information, and prevent the regulator from testifying about anything. This is not a good direction to go in, and ought to be handled by rules of general application rather than specific provisions of this law. Obviously companies aren't too keen about their information being disclosed, but wouldn't the best system be one of public transparency? If other businesses gain an edge by access to that information, the ultimate result is improved competition in the space, which would be good for consumers.

F. The Bank Of Canada: A Court?

The AMPs under the law are applied by the Bank of Canada. It's odd to have a central bank that takes on court-like functions (even if it's not new), and this function of the Bank of Canada might be particularly strained by the complex technical subject matter, compared to its more traditional mandate. It's a minor point, but it's a part of the overall question of whether the Bank of Canada is the best place to site a regulator of stablecoins, particularly when the parallel provincial regulators are well-equipped for this role (particularly in regard to dispute processes/tribunal functions).

Wrapping Up

The Stablecoin Act could have benefited from a review process. It could have been a part of harmonizing the rules in Canada with the United States and other jurisdictions. It could have been designed to assist the Canadian Dollar's transition to the new world of blockchains. There's a lot it could have done, and might have done, had it not been bundled into a 600 page omnibus bill. Having done that, the Liberals have made it more difficult to end up with a stablecoin law that will be as good as it could have been. Standalone legislation would have been a better choice. We'll see what the regulations do, and whether this law really ends up in force, but I suspect it will not do what it's authors intended it to do, or at least, won't do it as well as it could have.

Conclusion

I am a huge fan of stablecoins, and the accomplishments of QCAD and other stablecoins in Canada are impressive: they've created a whole new category. But the reality is that this is still a category that's young and growing. Given the state of the market, the rationale for this new bill (whatever exactly it is) seems flimsy. One of the surest moves the government can make to harm an industry is to prematurely regulate it, and with the new Stablecoin Act, this is a reasonable concern.

Stablecoins are here, they're big, but they're not using Canadian Dollars. I don't share the government's belief that piling on new federal rules is what's preventing Canadian Dollar stablecoins from achieving the success they deserve, and I'm skeptical that this law is the bridge that's needed to get there.