Navigating Stablecoin Regulation in Canada: Where Are We Now?

Canada’s regulation of stablecoins remains in flux, creating uncertainty for fintechs looking to offer Canadians faster and more cost-effective payment options.

Recently, Circle Internet Financial, the issuer of the USD Coin (USDC), became the first stablecoin issuer to comply with the Canadian Securities Administrators’ (CSA) requirements for Value-Referenced Crypto Asset (VRCA), commonly referred to as fiat-backed stablecoins (FBSC). Circle’s agreement to sign an undertaking allows regulated crypto asset trading platforms (“CTPs”) in Canada to continue offering USDC beyond December 31, 2024. Issuers who do not file such undertakings face delisting from registered CTPs.

While this development ensures continued access to USDC for Canadians, it also reveals significant challenges in Canada’s approach to regulating stablecoins and its implications for Web3 innovation and payments. The interim framework creates gaps in both investor and consumer protection. Below, we unpack why regulatory clarity is urgently needed and why Canada’s approach to regulating stablecoins is misaligned with other global jurisdictions. While there are different types of stablecoins, this blog specifically addresses fiat-backed stablecoins that are fully backed by cash and cash equivalents.

Canada’s Approach Undermines Stablecoins’ Use for Payments

In Canada, federal-provincial jurisdictional complexities have led to stablecoins being regulated under a securities framework. However, stablecoins like USDC function as digital money equivalents for on-chain trading and settlement, payments, and remittances.

This approach creates significant friction:

• Businesses using stablecoins to pay employees or vendors face uncertainty over whether their transactions involve securities.
• Consumers must worry about tax implications when using stablecoins for everyday payments.
• Payment service providers accepting stablecoins must consider whether they are effectively dealing in securities and need to register as securities dealers.

Unlike jurisdictions such as the European Union, which has implemented the Markets in Crypto-Assets (MiCA) framework or Australia, which is drafting stablecoin legislation, Canada lacks a clear legal framework for crypto assets. Instead, the CSA has asserted jurisdiction over FBSCs through staff notices:

• CSA SN 21-332 (February 2023): Suggests FBSCs could “constitute securities and/or derivatives in several jurisdictions.”
• CSA SN 21-333 (December 2023): Places additional requirements on FBSC issuers and CTPs trading them.

This misalignment treats FBSCs like USDC—non-yield-bearing digital payment instruments—as securities or derivatives, creating legal and operational barriers for businesses and consumers alike.

For a deeper dive into our recommendations and detailed engagement with the federal government on creating a robust regulatory framework for stablecoins, you can read our full submission here.

Circle’s Agreement: A Step Forward or a Temporary Fix?

Circle’s undertaking with the CSA is viewed by industry as a stopgap measure rather than a viable long-term solution. While it preserves access to USDC, it leaves fintechs operating in Canada in a difficult position:

• Inconsistent classifications: USDC is treated as a security under Canadian laws but as a payment instrument in jurisdictions like the U.S. and EU.
• Added complexity for issuers: Issuers must navigate dual regimes, with no federal path for licensing as a payment or e-money provider in Canada.
• Limited competition: The CSA has stated it will not accept undertakings from issuers who began distributing FBSCs after February 2023, creating barriers for new entrants.

Key elements of Circle’s undertaking include:

• Exemption for USDC from the $30,000 annual retail purchase limit applied to most crypto assets.
• Requirement for Circle to publish audited financial statements annually.
• Recognition that USDC is not considered a security or derivative in other global jurisdictions.

However, this interim approach fails to address critical challenges for Web3 innovation and payments, such as:

• Lack of a consistent, understandable regulatory framework: Canada lacks clear definitions for digital assets, especially as tokenization of real-world assets like stocks and bonds grows. We are of the view that tokenization does not change the underlying character of the asset (or liability) that is tokenized.
• Uncertainty for stablecoin issuers: In Canada, the absence of a clear federal framework for regulating FBSCs creates a dual regulatory regime for issuers: one for foreign stablecoin issuers who are licensed as payment/e-money Institutions in a foreign jurisdiction and prudentially regulated; and another for Canadian non-bank stablecoin issuers where, because there is no path to obtain an e-money license in Canada, the distribution of FBSCs in Canada is regulated under a disclosure regime.
• Impediments to innovation and commercialization: These interim arrangements present yet another barrier for Canadian fintechs who have built and tested integrated payment applications but can’t proceed to commercialization given the uncertainties. The lack of competition in payments is felt by Canadians. Interim decisions like the Circle undertaking also impact Canada’s productivity as wasted work will be done to retrofit to a different regulatory regime in the future.
• Added costs, complexity, and reduced competition: These conditions add complexity and cost for all fintechs. For example, the requirement for an FBSC issuer to apply for an exemption from securities law requirements for a payment product creates unnecessary regulatory burden on fintechs in Canada. It potentially puts small Canadian fintechs with limited capital at a disadvantage. For well-capitalized fintechs, it diverts capital from other projects. Although the CSA calls this an “interim approach,” there is the risk that this path dependency could become permanent.
• Gaps in investor/consumer protection: Reliance on disclosure-heavy securities regulations is not only impractical, it does not provide the level of prudential oversight that consumers expect from payment instruments. The OSC cautions that the interim approach provides no assurance that the issuer or the distribution of FBSCs are in compliance with applicable securities laws.
  
  

To explore our comments and insights provided to the Ontario Securities Commission regarding their Statement of Priorities for the 2025-2026 fiscal year, you can read our full submission here.

The Need for a Comprehensive Federal/Provincial Framework, Harmonised with other Global Jurisdictions

The Canadian Web3 Council advocates for a unified, principles-based regulatory framework that provides clarity for issuers, payment service providers, platforms, and users. Federal leadership is needed. Our recommendations include:

1. Revisiting the CSA approach to FBSCs: FBSCs should not be regulated as securities. Canada should align with other global jurisdictions that treat these assets as e-money or payment instruments. We ask the CSA to either rescind SN 21-333 guidance or to amend its guidance to state that it doesn’t apply to FBSCs used for payments given that it is unworkable for payment products like FBSCs.
2. Developing a taxonomy for digital assets: Canada must clearly define what is—and isn’t—a security, a derivative, a payment instrument, or a digital money equivalent. This would provide much-needed clarity for FBSC issuers, service providers, and users.
3. Establishing a federal prudential framework for FBSC issuers: Stablecoins used for payments should be regulated under a federal prudential framework, akin to e-money regimes in other jurisdictions. This framework should:
   • Require FBSC issuers to hold reserves fully backed by high-quality liquid assets and redeemable 1:1 for the referenced currency.
   • Implement operational safeguards and custody requirements for consumer protection.
   • Provide issuers with clear licensing pathways under a federal body.
4. Aligning with global standards: Canada should harmonize its regulatory approach with leading jurisdictions like the E.U. (MiCA) and the U.S., ensuring competitiveness and interoperability in the global digital economy.
5. Encouraging innovation and competition: A purpose-built framework must enable Canadian fintechs to compete while fostering innovation. For instance, Canada must address the lack of CAD-denominated stablecoins, which would enable cost-effective cross-border remittances and on-chain settlements in Canadian dollars.
6. Clarifying regulatory jurisdiction: Federal and Provincial policymakers must agree on the roles of securities regulators, payment regulators, and other agencies to avoid overlaps and inconsistencies.

The Stakes for Canada

Without decisive action, Canada risks falling behind in the global digital economy. The absence of a coherent framework discourages investment and innovation while leaving consumers and businesses without effective payment solutions.

Stablecoins like USDC have the potential to reduce settlement costs, improve cross-border payments, and enable programmable financial applications. For Canadian businesses and consumers to realize these benefits, policymakers must act decisively to:

• Provide legal certainty: Clarify the treatment of stablecoins under existing and new regulations.
• Foster trust: Ensure stablecoin issuers are subject to rigorous prudential requirements to safeguard reserves and ensure redemption rights.
• Support innovation: Allow stablecoin issuers and users to participate in Canada’s payments ecosystem on a level playing field.

Looking Ahead

This is a pivotal moment not only for the industry but also for Canada and Canadians. What’s needed is a commitment to action on a national and provincial level. The current regulatory regime prevents new entrants, limits competition, and discourages the adoption of CAD-denominated stablecoins, which are essential for Canada’s digital economy.

Canada has an opportunity to be a leader in developing a robust payment ecosystem. This requires recognizing FBSCs as digital money equivalents, providing issuers with a path to licensing, and bringing them under a prudential regulatory framework that supports payment innovation.

The Canadian Web3 Council remains committed to working with policymakers, regulators, and industry participants to achieve this goal.