Stablecoins are payments: our submission to the Bank of Canada retail payments supervision consultation

On May 21, 2024, CW3 responded to the Bank of Canada’s retail payments supervision consultation. Our submission focuses solely on the use of fiat-backed stablecoins as a means of payment. Read our full submission here.

This consultation is a step forward in developing supervisory policies and guidance for the Bank of Canada’s oversight of payment service providers (PSPs). This process was kickstarted with the passage of the federal Retail Payment Activities Act (RPAA) in 2021, which spells out the obligations of those who perform a payment function. The main objectives of the RPAA is to require payment service providers to register with the Bank of Canada, to safeguard end-user funds and to manage the operational risks associated with their business.

Our submission to the Bank of Canada emphasizes the following key points, among others:

  • Regulatory Oversight: We seek clarification that the concept of a payment function using fiat-backed stablecoins is captured under the RPAA as we believe that end-users will expect a regulated PSP to provide the same protections regardless of the means of payment. We continue to advocate for bringing non-bank issuers of fiat-backed stablecoins under federal jurisdiction to enhance financial stability and consumer trust.
  • Clarity for Payment Service Providers (PSPs): It’s been made clear that the RPAA does not currently cover crypto activities.  We seek clarification that the concept of a payment function under the RPAA includes the use of fiat-backed stablecoins, which would bring their use under the purview of the RPAA to be regulated as payment activities.

In our submission, we outline concerns that end-users who accept fiat-backed stablecoins as a means of payment will not have the same protections as those who accept only fiat currency. In addition, bringing non-bank issuers of fiat-backed stablecoins under federal jurisdiction will further enhance the goals of consumer protection and financial stability. We hope that continued dialogue between industry participants and supervisors will encourage safe and secure financial services offerings as payment systems built on blockchain rails become more prominent. 

Stablecoins are one of the most widely adopted and fastest-growing applications of public blockchains. While the retail and consumer-facing use cases are in the early stages, web3 businesses currently use stablecoins 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. 

Our proposal is critically time-sensitive following action from Canadian Securities Administrators (CSA) indicating that fiat-backed stablecoins are securities and/or derivatives. In practice, this will result in the
delisting of all stablecoins from Crypto Trading Platforms in Canada by October 31, 2024. It will also result in regulatory risk for other businesses using stablecoins, blocking stablecoins from being broadly available within Canada, and limiting business access to a fast, low-cost form of cross-border payments. 

We believe fiat-backed stablecoins used for payments are always fixed directly to the value of a currency, and they do not offer any profits or expectations of profits to the holder, and therefore are not securities or derivatives. As such,  fiat-backed stablecoins warrant their own regulatory regime as securities laws are a poor fit for their regulation. Read more on our response to the CSA here

Furthermore, regulating fiat-backed stablecoins as securities, rather than payment instruments, will make Canada an outlier amongst other countries. As payment instruments and per the nature of the Canadian financial system, fiat-backed stablecoins belong under federal jurisdiction and and we support the development of a robust framework for regulating fiat-backed stablecoin arrangements to promote trust in such payment systems. 

CW3 appreciates the opportunity to support ongoing government efforts to protect consumers. Through an informed and balanced approach, we believe Canada can enhance its global competitiveness in Web3, provide more choice in payments to consumers, and ensure a secure and inclusive digital economy for all Canadians.