Our submission to Finance Canada’s Digitalization of Money Consultation

The Canadian Web3 Council (CW3) is pleased to respond to the Department of Finance Canada’s consultations on the digitalization of money. The CW3 is a non-profit trade association founded by industry leaders to work constructively with policymakers and establish Canada as a leader in Web3 technology. The CW3 represents organizations that have made a critical impact on the development of Web3 technologies across the globe, and who are committed to responsibly building and innovating in Canada. Our membership is diverse, ranging from hackathon organizers to financial products, trading platforms and investors, and open-source blockchain projects.


Canadians are Embracing Digital Currency 

To provide some perspective on use of digital currency and other digital assets, CW3 undertook a poll in April 2022 to determine Canadians’ views of this growing industry (source: Nanos). The data demonstrates that Canadians are embracing digital currency: 

  • 10% of Canadians have a crypto wallet, the same as the number of people with RRIFs (10%) and slightly lower than those investing in RESPs (14%).
  • Canadians who have heard of cryptocurrency and have a positive impression of it most often say so because it is a promising alternative investment tool and it’s the future (44%).


Those surveyed also expressed strong support for a regulatory framework that supports the public interest, with three in five Canadians demonstrating support for the Federal Government working with cryptocurrency experts to introduce new regulations or laws around cryptocurrency. Accordingly, we submit that Canada needs to take a pro-innovation position on Web3 by encouraging smart regulation so that home-grown companies can continue to innovate and educate Canadians on the benefits and risks of Web3. 


The Benefits of Digital Money 

The digitalization of money has many benefits, including the ability to transact value with anyone, anywhere, instantly and for free or at low cost. Beyond its incredible economic potential, it offers new standards of security,  efficiency, transparency, and coordination, which are critical to helping solve some of the greatest challenges facing the digital economy. 

For example, digital currency has made it possible to perform low-cost, near-instantaneous currency transfers around the world. This allows many new Canadians to rely on digital currency to send money back to their families. For them, it’s a cheaper and more reliable way to make sure more of their money lands in the hands of those who need it most, with the least amount of conversions. Once the currency is received, it can be used to purchase goods or services directly, or exchanged for another currency like the US dollar. This inclusivity and accessibility is one of the things that makes digital currency so powerful. 

Digital currencies also have the potential to unlock new use cases in payments, including microtransactions that have to date not been economically feasible due to fees charged by third parties. For example, someone wants to access paywalled content online, but does not want to purchase a full subscription to that outlet. That person could send a microtransaction to the publication’s cryptocurrency wallet. In this case, the consumer benefits by only paying for the content they want, and the publication benefits by increasing user engagement. 


The Risk of Non-Compliant Platforms

Despite the many benefits of digital currency, risks to users and the system remain. From our perspective, one of the biggest risks continues to be unregulated centralized foreign exchanges and the lack of harmony amongst the Canadian regulators in applying the regulatory framework that was established in 2020 by the Canadian Securities Administrators and the Investment Industry Regulatory Organization of Canada (now the New Self Regulatory Organization of Canada). These risks include the lack of mandated AML programs that increase the risk of suspicious activities, unregulated advertising misleading customers, large unchecked volumes of sensitive client data having the potential to be compromised, and the risk of users being exposed to outright fraudulent actors. 

Many Canadian crypto trading platforms and many other Canadian web3/crypto businesses already have implemented robust compliance programs to protect against insolvency, misuse or theft of customer assets, money laundering, terrorist financing, sanctions evasion and other illegal activities. Consistently applying the regulatory framework that already applies to web3/crypto businesses operating in Canada, as well as providing further regulatory clarity to this industry as regulatory views continue to evolve, is the best way to protect investors and the Canadian financial system by allowing reputable and compliant Canadian businesses to continue innovating and competing fairly in the market both domestically and internationally. 

Accordingly, we submit that ensuring user adoption of compliant products is the best way to combat bad actors. Specifically, the Government of Canada should do more to incentivize Canadians to use regulated, domestic platforms and disincentivize foreign unregulated centralized platforms through stronger, more consistent enforcement action. This would help prevent Canadians’ exposure to crises like FTX by preventing them from interacting with other unregulated centralized foreign exchanges that may lead to systemic risks. As a practical example, allowing compliant platforms to integrate with Canadian banking would be a straightforward way to improve user experience and value of compliant platforms. This would also allow compliant platforms to reduce friction and offer a more seamless experience to users.   

Another significant risk is financial and technological literacy. We believe the government must do more to support financial literacy to reinforce the benefits of using regulated, Canadian platforms that adhere to Canadian regulations. Other risks include the lack of cohesion in the current regulatory environment, lack of legal and tax clarity, and systematic gaps ranging from limited banking access, limited custody and insurance options. 


Effectively Regulating Centralized Stablecoins 

Stablecoins provide an important use-case, but must be effectively regulated to protect investors. Accordingly, CW3 submits that the primary focus of regulators should be on centralized stablecoins intended for commercial use, not decentralized stablecoins. Regulators should focus on centralized stablecoins for several reasons. Firstly, they’ve scaled to a level of mainstream adoption at which they might present a significant risk to users. Second, as trusted custodians, they operate in a very similar way to existing centralized financial institutions. Ultimately, limiting the possibility of a potential bank-run on a stablecoin issuer is paramount, and we believe the Federal Government should take the lead in establishing a framework for the supervision of centralized stablecoins. 

CW3 further submits that securities laws and banking regulation are poor fits for centralized stablecoins since they are not investments or deposit taking institutions that lend – they are payment instruments. An appropriate regulatory approach to stablecoins should recognize that they are a payment mechanism, focus on ensuring the cash or other assets backing the stablecoin are properly safeguarded, and that there is transparency around reserves. This is in contrast to treating stablecoins as securities or derivatives under provincial securities laws or “deposits” under the oversight of OSFI. High integrity centralized stablecoin issuers maintain low risk profiles by keeping reserves in fiat and the lowest-risk investments like treasury bonds, and as such do not face the same types of risk as deposit taking institutions. Additionally, securities laws are not a good fit for stablecoin regulation because most stablecoins are not an investment, they are a payment instrument. Finally, we also believe that the regulation of stablecoins as a payment instrument is a more appropriate mechanism than adopting a fragmented provincial approach and is consistent with the approach being taken in other jurisdictions (e.g. Markets in Crypto-Assets Regulation in the European Union).

Accordingly, the CW3 is of the strong view that the Retail Payment Activities Act (RPAA) is the natural instrument for regulatory oversight of asset-backed stablecoins in Canada. The recently passed RPAA has the flexibility to be able to regulate the activities of stablecoins while helping to protect consumers and provide financial stability to the inherent risks involved. We therefore encourage Finance Canada to consider this as it develops the regulatory framework under the RPAA during 2023. 

As a first principle, we also believe the framework for stablecoins must also allow innovation by Canadian Web3/crypto businesses to promote competition with other payment mechanisms that are primarily controlled by banks. The approach should be clear, consistently applied and aligned with our international peers so that Canada can be a leader in Web3 technologies. A poorly thought out regulatory approach to stablecoins could hurt many Canadian crypto/Web3 companies in the long run because users will go to other jurisdictions that offer more competitive products and services, which could also put Canadian consumers at risk. For example, a regulatory approach that only allowed banks to issue stablecoins would not promote competition in payments, an area currently dominated by banks.

Lastly, with respect to decentralized stablecoins, we submit that further exploration and study of the technology is required by regulators, as is being done in the European Union. For example, the final texts of Markets in Crypto Asset regulation in the European Union have currently excluded DeFi, that is, crypto asset services provided in a “fully decentralized manner without any intermediary.”  


Design Principles of a Central Bank Digital Currency (CBDC) 

As a first principle, CW3 believes the Bank of Canada needs to establish a clear criteria and consult with industry about design principles before proceeding with a CBDC. Most importantly, the development of a CBDC should not stop the government from making policy progress into other areas of Web3, namely stablecoins. Should the government decide to move forward with the establishment of CBDC, CW3 and its members hold the position that:

  1. The design principles will be of high importance and should be thoroughly consulted with the Web3 sector;
  2. a CBDC should be should be forward looking in design and compatible with permissionless blockchains; 
  3. a CBDC should be focused on solving fundamental problems of traditional fiat such as improving interoperability between systems and for cross border payments;
  4. a CBDC should be two-tiered with the participation of banks and FinTechs serving as intermediaries between users and the central bank (this is especially important to maintain consumer privacy);
  5. a CBDC should be utilized to fill gaps within the Real-Time Rail (RTR), Open Banking, and stablecoin infrastructure;
  6. a CBDC must have strict privacy standards, such that the holders of CBDCs cannot be identified or have their CBDCs revoked for reasons outside those currently applied to cash; and that
  7. CBDCs and stablecoins are not mutually exclusive. If the government proceeds with a CBDC, it should still allow private issuers of stablecoins. This is necessary to maintain the global competitiveness of CAD, given that many domestic and foreign buyers would not necessarily want to hold CBDCs but would want access to CAD. 


As Finance Canada, in conjunction with the Bank of Canada, continues to pursue research on a CBDC, CW3 looks forward to continued collaboration in pursuit of these guiding principles to ensure that Canada remains a vibrant market for innovation in digital currency. 



In conclusion, CW3 thanks Finance Canada for the opportunity to provide these comments. We believe we can better unlock innovation with policy and regulations that strike the right balance between sector growth and protecting consumers and look forward to continued engagement with the department to ensure the Government of Canada’s public policy approach to the digitalization of money supports the continued growth of Canada’s domestic Web 3 economy. Canadian Web3/crypto companies want to be involved in building the regulatory future of Web3 in Canada. The sector has immense compliance, accounting, legal, technical and regulatory expertise and we look forward to offering this expertise to governments in pursuit of sound public policy.