Strengthening Canada’s Financial Sector: Our Response to the Department of Finance’s Consultation

The Canadian Web3 Council (CW3) recently responded to the Department of Finance’s consultation on strengthening competition in the financial sector. This consultation offers an opportunity to examine and leverage the benefits of emerging financial technologies to promote Canada’s competitiveness in the financial services industry. Read the full submission

The Department of Finance’s consultation aims to gather insights on enhancing competition within the financial sector, with a focus on ensuring consumers’ access to a broad range of affordable, innovative, and consumer-focused services that meet their banking needs.

This initiative is particularly significant for the crypto sector, as it seeks to identify and address existing barriers to banking services, potentially paving the way for crypto businesses to establish better banking relationships and participate in the financial market. 

Key Areas of Focus

Our submission focuses on two critical areas where immediate action could significantly benefit Canadians:

Regulatory Clarity for Emerging Technologies: Technological innovation in financial services can unlock access to new products and services for consumers and enhance competition in the market, especially from smaller, disruptive companies. Regulatory clarity is necessary for the adoption of these innovative technologies.

Access to Basic Banking for Cryptocurrency Businesses: There is an urgent need to improve access to basic banking for cryptocurrency companies in Canada. These businesses face significant barriers in accessing basic banking services, especially from larger financial institutions, which prevents these firms from investing in products and services that would provide greater choice to Canadians.

Tackling Current Barriers

Innovation and Choice in Payments

Canadians suffer from a lack of innovation and choice in payments, as consumers and businesses are currently grappling with high costs and slower payments in comparison to other jurisdictions.

Unlike many of our international counterparts, Canada lacks a Real-Time-Rail payment system, and emerging payment solutions like stablecoins do not have a robust regulatory framework for adoption. 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. Stablecoins offer consumers and businesses more ways to conduct transactions and have the potential to become widely used in Canada for daily payments. With their potential for efficiency and cost reduction in transactions, stablecoins could revolutionize daily payments and financial services if supported by clear and forward-looking regulations.

Banking Access for Crypto Businesses

The cautious approach of the banking sector towards the emerging digital asset industry has resulted in significant access barriers for cryptocurrency companies. These barriers restrict access to basic banking services that these businesses require to maintain daily operations and invest in growth, thereby restricting the introduction of competitive and innovative financial solutions to the Canadian market.

Recommendations for a Competitive Future

Support for Disruptive Competitors: Reducing entry and expansion barriers for non-bank payment service products such as fintechs, especially those leveraging stablecoins, could enable a new wave of competition and innovation in the payments sector.

Regulatory Framework for Stablecoins: Clear regulations for stablecoins as payment instruments would ensure their safe adoption as an efficient and transparent alternative to traditional payment methods, contributing to the stability and security of Canada’s financial ecosystem. 

We recommend that the government heed a report from the House of Commons Standing Committee on Industry and Technology which recommends that “the Government of Canada adopt a distinct regulatory approach to stablecoins that reflects the difference between these products and other cryptocurrencies, and accounts for the unique regulatory challenges they present.”

Addressing Market Concentration and Barriers: Accelerating the implementation of Real-Time-Rail, embracing consumer-driven finance, and integrating stablecoins in payment modernization efforts could address several of the well-documented deficiencies in the payments space, including interchange fees, reconciliation delays, consumer preference and lack of convenience. 

Taken together, these aforementioned obstacles amount to capital constraints on companies seeking to make improvements in the financial services space, thereby depriving consumers of increased choice in the marketplace. Accordingly, it is our recommendation that the government, OSFI, and industry engage in consultations to establish guidelines for financial institutions’ treatment of companies offering products or services related to cryptocurrencies.

The Role of Government and Provinces in Fostering Competition

A collaborative effort involving thorough consultations with the industry to craft a national blockchain strategy and clearer regulatory guidelines for digital assets is imperative.

Recently, the Canadian Securities Administrators (CSA) determined that all privately issued stablecoins are securities and/or derivatives; an approach that if continued, would block stablecoins from being available in Canada.

We recently outlined our concerns about this approach in a letter to the CSA, read the full letter here.

It is our recommendation that the federal financial regulators collaborate with the CSA to launch a public consultation involving relevant stakeholders on the governance of stablecoin issuers. The federal government has an essential role to play in the regulation of stablecoins, and consultation with industry will help to determine the best solution for a federal regulatory framework.

Such coordination between federal and provincial entities, coupled with public consultations on stablecoin governance, could pave the way for innovative financial technologies to thrive, enhancing competition and consumer choice. A rushed regulatory approach absent such consultations and collaborations will only inflict more costs, red tape, and uncertainty on Canadian citizens and businesses.

Conclusion

As Canada seeks to strengthen competition in its financial sector, technological innovation and the adoption of emerging financial technologies are imperative to fostering a more competitive landscape. The CW3 believes that by adopting these recommendations, Canada can position itself as a leader in the financial sector, leveraging innovative technologies for a more inclusive and competitive marketplace.