We recently participated in an important consultation regarding strengthening Canada’s financial sector. In our submission, we emphasize the need for regulatory frameworks that keep pace with rapid technological advancements in the financial sector. As Web3 technologies like blockchain and decentralized finance (DeFi) reshape how value is transferred and stored, it is crucial to foster innovation while protecting consumers. Canada needs to establish a supportive regulatory environment to create a digital economy, remain competitive and attract investment, similar to proactive steps taken by the European Union, Singapore, Switzerland, and the United Kingdom,
This summary outlines CW3’s key points and recommendations from the consultation. You can see the full submission here.
General Comments
As Finance Canada considers necessary refinements to the legislative framework, we urge policymakers to adopt a balanced approach that safeguards consumers while leaving ample room for innovation. Overly prescriptive regulations risk stifling the development of emerging technologies like Web3. Instead, we recommend a principles-based approach that focuses on outcomes such as consumer protection, financial stability, and market integrity.
It is equally important that existing legislation accommodates the digital economy. For example, the Bank Act envisions banking activities taking place in physical branches, and the Bank of Canada Act addresses money issued in physical, but not digital, form. Updating these and other statutes is essential for Canada to transition to a financial system underpinned by emerging technologies.
Regulations must remain technology-neutral to adapt to rapid advancements, ensuring a level playing field for all players, including traditional financial institutions and emerging Web3 firms. Collaboration between federal and provincial regulators is essential to harmonize regulations and prevent operational challenges for innovators, as seen in other jurisdictions like the EU’s MiCA framework.
On Collaboration and Regulatory Predictability
We commend Finance Canada for recognizing the need for greater coordination among federal, provincial, and territorial regulators to create a more harmonized regulatory environment, which will reduce friction and support the Web3 industry’s growth. Regulatory predictability is crucial for startups operating with limited capital, and a consultative approach with periodic updates on regulatory changes will help the sector prepare for new requirements.
We recommend impact assessments for new regulations and emphasize the importance of global regulatory harmonization, particularly for cryptocurrencies and blockchain. Additionally, enhanced cybersecurity efforts, collaborative forums on international issues, and a focus on data privacy compliance will be critical for the sector’s stability.
The Council also supports educational initiatives to improve consumer understanding of digital assets and stresses the importance of self-regulatory organizations (SROs) in setting industry standards to foster responsible innovation without burdening government regulators.
Access to Financial Services
One of the biggest challenges for the Canadian crypto industry is the difficulty in accessing basic financial services, as many traditional banks remain hesitant to serve crypto-related businesses due to regulatory uncertainty, reputational risks, and a lack of understanding of blockchain technology. This reluctance hampers crypto companies’ ability to perform essential operations, scale their businesses, and compete globally.
To address this issue, there needs to be increased collaboration between crypto businesses, financial institutions, and regulators to bridge the knowledge gap and develop more nuanced risk assessments. Although the industry has shown resilience through workarounds, a more supportive regulatory framework and improved access to banking services are essential for fostering innovation and helping Canada maintain its leadership in this rapidly evolving sector.
Adapting to Geopolitical Risks
As Canada faces emerging geopolitical risks and national security threats, the government is right to consider significant regulatory changes, particularly for the cryptocurrency sector. While safeguarding against threats like money laundering and fraud is crucial, cryptocurrency accounts for just 0.34% of global illicit transaction volumes. Blockchain’s transparency and immutability offer an advantage in tracing transactions and combating fraud more effectively than traditional systems.
Policymakers must craft regulations that address security concerns while supporting innovation and preserving Canada’s competitive edge in the global digital finance landscape. The consultation process requires constructive dialogue between government and industry to ensure reasonable oversight that fosters growth. The outcome of these regulations will influence Canada’s position in the global financial ecosystem, setting a precedent for future technological innovations in the financial sector. Balancing security and innovation will be key to ensuring long-term progress.
Stablecoins: A Critical Component of the Web3 Ecosystem
Turning to a specific regulatory issue, we believe leadership on the treatment of fiat-backed stablecoins should be a priority. As digital equivalents of money, these assets, typically pegged to fiat currencies, play a critical role in the evolving digital economy. Clear rules on their issuance, backing, and oversight are essential for industry certainty and consumer trust.
Stablecoins are integral to the crypto ecosystem, facilitating payments, remittances, liquidity, and supporting DeFi applications. With a market capitalization of US $171 billion (about 8.5% of the total crypto market), stablecoins are essential for near-instant value transfers in Canada, especially in the absence of a real-time payment system.
However, the current regulatory approach in Canada, where the Canadian Securities Administrators (CSA) classifies stablecoins as securities or derivatives, is restrictive and risks stifling innovation. Fiat-backed stablecoins are primarily used for payments, not investment, and should be treated as payment instruments rather than securities.
We strongly recommend that the federal government take a leading role in prescribing the criteria for flat-backed stablecoins to be digital money equivalent and to distinguish such tokens from securities and/or derivatives. This suggested approach would better align with international efforts such as those taken by the EU, UK, Singapore etc. Such a framework would:
- Recognize fiat-backed stablecoins as payment instruments rather than securities or derivatives;
- Focus on ensuring proper custody of reserve assets, proper asset backing and transparency of reserve assets; and
- Prioritize consumer protection, operational and financial resilience of fiat-backed stablecoin issuers, and financial stability without stifling innovation.
We believe the Retail Payment Activities Act (RPAA) provides an appropriate regulatory framework for overseeing the use of fiat-backed stablecoins in Canada. This would allow for effective regulation while avoiding the pitfalls of applying securities laws to payment instruments.
We also recommend developing a comprehensive and tailored framework that explicitly includes non-bank issuers of fiat-backed stablecoins within its scope. This framework should detail specific requirements for stablecoin issuers, including mandatory registration with FINTRAC, capital and liquidity requirements for assessing the financial resilience of fiat-backed stablecoin issuers, regular audits of reserve assets, and clear disclosure of backing mechanisms etc. Capital requirements and risk management protocols should be tailored to the unique characteristics of stablecoins. For instance, issuers should be required to maintain high quality and liquid reserve assets of at least equal to 100% of the outstanding value of the stablecoin supply.
The RPAA’s existing provisions on operational risk management could be adapted for stablecoin issuers by requiring robust cybersecurity measures, regular penetration testing, and comprehensive disaster recovery plans. Consumer protection measures could include mandatory disclosures about redemption processes, fees, and other aspects associated with stablecoin usage.
We also urge policymakers to distinguish between centralized and decentralized stablecoins in their regulatory approach. The primary focus should be on centralized stablecoins intended for commercial use, as these have reached a scale that warrants regulatory attention. By developing a clear, consistent, and innovation-friendly regulatory framework for stablecoins, Canada can position itself as a leader in the global Web3 ecosystem while ensuring adequate protections for consumers and the financial system.
Conclusion
The Canadian Web3 Council believes Canada has an opportunity to position itself as a global leader in Web3 innovation. By focusing on principles-based regulation, fostering collaboration between industry and regulators, and ensuring flexibility in how regulations evolve, Canada can build a financial sector that is both innovative and secure. We look forward to working with policymakers to achieve these goals and drive the growth of Web3 technologies for the benefit of all Canadians.
