Following the failure of the Canadian parliament to consider legislation, central bank researchers believe that regulation is the key to reaping the benefits of fiat-referenced crypto assets.
The Bank of Canada published an analytic note on fiat-referenced crypto assets, also known as stablecoins, on December 19. In addition to a review of mechanisms for creating and distributing stablecoins, as well as a list of potential risks and benefits, the note expressed the authors’ support for additional crypto asset regulation.
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. According to the note, they are primarily used on cryptocurrency trading platforms, but they have the potential for a wide range of other applications, particularly when combined 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 the concentration of the identified risks. Concentration risk applies to both stablecoins and stablecoin holders:
“At the moment, the top three fiat-referenced cryptoassets control 90% of the total fiat-referenced cryptoasset market; […] Similarly, the top 1% of investors own 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.
Despite international standards-setting bodies’ guidance on the regulation of fiat-referenced cryptoassets, “most existing regulatory regimes, in Canada and elsewhere, are not currently fit for purpose,” according to the note. It summarised current frameworks and interim measures 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 particularly intriguing given the current state of cryptocurrency regulation in Canada. In February, Bill C-249, the “Encouraging the Growth of the Cryptoasset Sector Act,” was introduced in the Canadian House of Commons. The bill received widespread support from Canada’s crypto community, but it proved politically divisive and was effectively killed after its second reading.
