Advocating for Web3 Growth: Our Submission to the Federal Budget 2024 Consultation

What is Web3?

Web3, which includes blockchain and cryptocurrencies, has quickly evolved from a technology used by hobbyists to a global industry currently valued in the trillions of dollars. But beyond its incredible economic potential, it offers new standards of efficiency, transparency, and coordination, which are critical to helping solve some of the greatest challenges facing both the digital economy and more traditional sectors.

At its core, web3 technology aims to enable direct interactions between users without relying on intermediaries. It emphasizes the use of decentralized applications (dApps) that run on blockchain networks, where data and processes are distributed across a network of nodes, making them resistant to censorship, manipulation, and single points of failure. Overall, web3 technology represents a paradigm shift towards a more decentralized, open, and user-centric internet, empowering individuals and communities with greater control over their digital lives.

Canadians must work together to build a robust, equitable and sustainable digital economy. The stakes are too high to do otherwise. If we fail, Canadians could miss out on participating in the most important innovations in decades, and Canada could fall behind other jurisdictions that have taken steps to harness the innovations offered by web3 in the digital economy.

What Government Can Do Today

Canada has a growing blockchain sector. Small and medium business use of blockchain technology grew by 30% from 2019 to 2021. More than one in eight Canadians own at least one cryptoasset. And Canada has been the birthplace of many world leading web3 technologies, like Ethereum.

However, this is in spite of Canada’s regulatory environment. Not because of it. As with any relatively novel and rapidly evolving sector, there are many new regulatory challenges to contemplate for governments. Currently, there are both significant regulatory and legal gaps and barriers that create a high-risk environment for running a web3 business in Canada. In areas where there has been regulatory oversight, such as securities regulations, there are measures that, while well-intentioned, do not actually protect investors and only serve as a competitive disadvantage for companies operating in Canada. 

In fact, one of the most significant risks stems from the lack of clarity of jurisdiction between federal regulators and provincial securities regulators. This has the risk of allowing inertia to become the primary driving force in how policy is made. Not smart regulation that benefits Canadians.

The government must carefully consider the structure of Canada’s web3 sector. The global market capitalization for the web3 sector stands at $1.72 trillion (as of Feb 8, 2024), with forecasts indicating continued growth. This trend presents significant opportunities for future growth and prosperity within Canada’s web3 initiatives, aligning with global advancements in blockchain and related technologies. But that future is not guaranteed. If Canada continues as a risky place for web3 companies to do business, an uncertain place to store cryptoassets, or a place that does not have a clear vision on the future of digital money, other countries may pass us by.

Our allies have seen this vision, and many are starting to take a holistic look at how to manage this sector. The European Union has moved forward with the Markets in Crypto Assets Regulations. The United Kingdom has moved forward with a plan to make them a global cryptocurrency hub. India has released a National Strategy on Blockchain.

With the productivity challenges that Canada has faced, and the economic challenges on the horizon, we cannot afford to allow the web3 sector to pass us by. We need a fulsome policy, built with industry, to ensure our future prosperity and to secure our position as leaders in the blockchain space.

Recommendation 1: Begin thorough consultations with industry with an eye to a national blockchain strategy, including a plan for federal and provincial coordination, that clarifies the government’s policy direction and regulatory approach.

Much of the attention related to digital assets is paid to cryptocurrency that is used primarily for speculation or investment. However, that is missing a significant part of the conversation, particularly around stablecoins. Stablecoins are a type of digital asset designed to maintain a stable value over time, most commonly by being pegged or tied to a fiat currency. 

A fiat-referenced stablecoin can function as both a store of value and a digital payment instrument. Businesses can use them to receive payments from customers, pay suppliers and contractors, process payments for online merchants, provide remittance services, and exchange them with other Canadian businesses and consumers that use them for similar purposes. 

Currently, fiat-referenced stablecoins are issued by various non-bank entities, primarily foreign entities, and generally fall outside of any established regulatory frameworks in Canada. Broadly speaking, stablecoins now have a collective market capitalization of around US $137 billion and represent about 8 percent of the total cryptocurrency market (as of Feb 8, 2024). Stablecoins are one of the most widely adopted and fastest-growing use cases of public blockchains.

Recently, the Canadian Securities Administrators (CSA) determined that all privately issued stablecoins are securities and/or derivatives. If continued, the CSA’s current approach will block stablecoins from being available within Canada, limiting the access of Canadian businesses and consumers to a fast, low-cost form of cross-border payments and preventing innovative businesses from being built. The CSA should not be regulating all stablecoins. The federal government has a big role to play in the regulation of stablecoins. Consultation with the industry will help to determine the best solution for a federal regulatory framework.

In its recent report, Blockchain Technology: Cryptocurrencies and Beyond, the House of Commons Standing Committee on Industry and Technology wrote: “The regulation of stablecoins was put forward by witnesses as one area where the federal government could play a larger regulatory role and distinguish these products from other, more speculative, forms of cryptocurrencies. The Committee agrees that these products have different use cases than other cryptocurrencies and raise unique regulatory concerns.” The Committee recommended “[t]hat the Government of Canada adopt a distinct regulatory approach to stablecoins that reflects the difference between these products and other cryptocurrencies, and account for the unique regulatory challenges they present.”

There are numerous well documented deficiencies in the payments space today: interchange fees, security, reconciliation delays, consumer preference and lack of convenience. We believe these can be improved with the broader use of stablecoins as payment methods. We believe that regulating stablecoins is a first step towards a future where payments can be secure, immediate, and convenient.

Recommendation 2: Regulate stablecoins as payment instruments, and remove all uncertainty about what class of assets they are.

Finally, there are also broad non-financial uses for web3 technology that are often ignored.  Blockchain has the potential to transform many industries, particularly anything where secure records are important. The blockchain acts as, effectively, a tamper proof ledger where any changes are visible. There have been notable use cases for blockchain in agriculture, shipping, and cyber security. These are all areas where the Government of Canada has a large footprint.  But the Government has fallen behind the private sector on blockchain adoption. Pilot projects would send a strong message to the Canadian blockchain industry that the Government is supportive and is invested in the success of the sector.

Peer countries have begun to take action in this regard. The United States, Australia and India have all begun pilot programs for using domestically sourced blockchain applications to solve the  big problems of the day. This support from the Government will put them on the front foot. We believe Canada can and must do the same.

Recommendation 3: Establish pilot projects for the Government’s use of blockchain in the food security, cybersecurity, and taxation spaces.

The web3 sector in Canada, particularly the blockchain space, is at a key juncture. Many of our peer countries are embracing the sector, whether through smart regulation of digital assets, or more broad adoption of blockchain technology. Canada is at risk of missing out on the next technological revolution, that could be as significant for our future prosperity as the advent of the internet or artificial intelligence. However, CW3 believes that if we take these simple steps, it will reset Canada on the right path towards having a strong and prosperous web3 sector.

Conclusion

The web3 sector in Canada, particularly the blockchain space, is at a key juncture. Many of our peer countries are embracing the sector, whether through smart regulation of digital assets, or more broad adoption of blockchain technology. Canada is at risk of missing out on the next technological revolution, that could be as significant for our future prosperity as the advent of the internet or artificial intelligence. However, CW3 believes that if we take these simple steps, it will reset Canada on the right path towards having a strong and prosperous web3 sector.