The Bank of Canada emphasizes the need for regulation of stablecoins when the legislation is presented

Bank of Canada staff released an analytical note on fiat-referenced cryptoassets, otherwise known as stablecoins, on December 19. In addition to a review of mechanisms for creating and distributing stablecoins and a list of potential risks and benefits they entail, the note expressed the authors’ support for further regulation of cryptoassets.

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

“These cryptoassets can bring efficiency and greater competition to payment services, especially in a more digitized economy. But without safeguards, they can pose significant risks to the stability of the financial system,” the authors wrote.

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

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

Such concentration means that effects on these coins and their holders can have a greater impact on the economy as a whole.

Related: Canada bans crypto-lending and margin trading after FTX collapse

Despite guidance from international standard-setting bodies regarding the regulation of fiat-referenced cryptoassets, “most existing regulatory regimes, in Canada and abroad, are currently not fit for purpose,” the note said. It briefly outlined frameworks and temporary measures that are 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 memo was perhaps most interesting in light of the current state of cryptocurrency regulation in Canada. Bill C-249, “Encouraging the Growth of the Cryptoasset Sector Act,” was introduced in 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 second reading.