Our Response to OSFI’s Stablecoin Consultation

The Office of the Superintendent of Financial Institutions (OSFI)1 recently held a consultation on international recommendations related to, and risks posed by, fiat-referenced cryptoasset arrangements and activities (or in other words, fiat-backed stablecoins).2 CW3 submitted to this consultation on behalf of the Web3 sector, see our full submission here.

A fiat-referenced cryptoasset can function as both a store of value and a digital payment instrument. Currently, fiat-referenced cryptoassets are issued by various non-bank entities, primarily foreign entities, and generally fall outside of any established regulatory frameworks in Canada. Broadly speaking, fiat-referenced cryptoassets now have a collective market capitalization of around US $128 billion and represent about 12 percent of the total crypto currency market (as of June 16, 2023). Fiat-referenced cryptoassets are one of the most widely adopted and fastest-growing use cases of public blockchains.

The most recent OSFI consultation has implications for how Federally Regulated Financial Institutions (FRFI’s) are involved with fiat-referenced cryptoassets, for instance, as an issuer, as a custodian and potentially as a user. It is one of many as it relates to OSFI’s regulation of FRFI’s and their involvement with crypto. Last year, OSFI consulted on FRFI’s capital and liquidity treatment of cryptoasset exposures (see our submission here). It is expected that OSFI will publish results from these consultations in 2024.

We outline the main components of our most recent OSFI submission below:


Benefits and importance of fiat-referenced cryptoassets 

Fiat-referenced cryptoassets and other stablecoins can provide a store of value that may be less volatile than other crypto assets, depending on their underlying structure and if properly managed. Perhaps more importantly, they are fundamentally new payments technologies that offer numerous benefits compared to existing payment systems:

  • Stablecoin transactions occur on global blockchain networks, offering faster and more transparent payments than traditional methods, especially for cross-border settlements.
  • They may have lower network fees, and can be initiated anytime, without the constraints of regular business hours. Stablecoin payments are irrevocable once confirmed, providing beneficiaries certainty of receipt, and their use of broadly adopted crypto standards promotes competition and interoperability.
  • The transactions are permanently recorded on public networks, enhancing traceability, and their integration into smart contracts allows automation of complex financial functions.
  • Stablecoins can also boost financial inclusion by providing digital services to the unbanked and underbanked.

In our collective experience, fiat-referenced cryptoassets are already used by Canadians and businesses to buy goods and services, pay contractors and vendors, and make investments in businesses.

Fiat-referenced cryptoassets are also a valuable tool for Canadian CTPs to ensure they manage counterparty and settlement risk with trading counterparties and reduce systemic risk. Additionally, recognizing fiat-referenced cryptoassets as a payment instrument will give consumers access to assets on a 24/7/365 basis.

Canadians can currently obtain fiat-referenced cryptoassets from various sources. Virtually all cryptoasset trading platforms (CTPs) servicing Canadians, including many of CW3’s member CTPs, allow Canadians to buy, sell, deposit or withdraw one or more fiat-referenced cryptoassets. Canadians can also obtain fiat-referenced cryptoassets using decentralized finance (DeFi) protocols for exchanging cryptoassets.


Regulating fiat-referenced cryptoassets as a Payments Instrument

In March 2023, we submitted to the Department of Finance’s Digitalization of Money consultation and asserted that securities laws and banking regulation are poor fits for most stablecoins, including fiat-referenced cryptoassets, since they are not investments or deposit taking institutions that lend – they are payment instruments. Similarly, in our submission to OSFI, we reiterated that fiat-referenced cryptoassets function primarily as a stored value retail payment instrument.

Fiat-referenced cryptoassets used for payments are always fixed directly to the value of a currency, and so they do not offer any profits or expectations of profits to the holder, and therefore are not securities or derivatives, and warrant a different regulatory regime.

While OSFI’s regulatory regime may be satisfactory for functions performed by existing federally regulated financial institutions, it is not applicable when applied to setting standards for payments infrastructure and regulating payment service providers. An appropriate regulatory framework for fiat-referenced cryptoassets is extremely important. Certain jurisdictions have already introduced legislation to regulate fiat-referenced cryptoassets, such as the e-money provisions of the European Union’s Markets in Crypto Assets (MICA).

What tools do we have available to us now to regulate stablecoins in Canada? CW3 believes the federal Retail Payments Activities Act (RPAA) could be one avenue. The RPAA has been enacted to regulate non-bank payment services providers, and public consultations have recently closed on the draft regulations under the RPAA. At present, there is a lack of clarity regarding whether the RPAA applies to fiat-referenced cryptoassets. Clarifying the RPAA’s application to fiat-referenced cryptoassets and adapting regulations where required would ensure that different non-bank payment systems are regulated consistently, under one piece of legislation, regardless of the underlying technology or business model.

We encourage OSFI,  Finance Canada, the Bank of Canada, Financial Consumer Agency of Canada to work together and with the industry and other stakeholders to develop an appropriate Canadian regulatory framework governing fiat-referenced cryptoassets under the federal RPAA. 


The principle of “same activity, same risk, same regulation”

In their consultation, OSFI references that the Financial Stability Board (FSB) has drafted international recommendations with regards to stablecoins based on the principle of “same activity, same risk, same regulation”, which is a principle in financial regulation that proposes that if two different entities (like banks, insurance companies, or fintech firms) are conducting the same type of activity that entails the same type of risk, they should be subject to the same set of regulations.

This principle is often proposed in the context of the evolving landscape of financial services, especially with the advent of fintech and crypto that are increasingly providing services similar to, or in the realm of, traditional financial institutions. The concept is centered around the idea of a level playing field, where the same rules apply to all participants, regardless of their status or the particular sector they represent.

However, this principle is not without challenges because crypto and fintech companies often have business models that are fundamentally different from traditional financial institutions. The ongoing debate involves finding the balance where the system is protected but innovation is not stifled..

In our submission, we emphasized that policy approaches for cryptoassets, including fiat-referenced cryptoassets, need to consider how risks relating to cryptoassets and open, decentralized networks may be different than risks in other systems and/or that cryptoassets and open, decentralized networks may mitigate risks in different ways.


Maintaining Canada’s Competitiveness

Competition and innovation in payments is a critically important policy issue within Canada and globally. We believe that the framework for fiat-referenced cryptoassets must ensure that the regulatory objectives do not stifle innovation or competition for the Web3 sector. The approach should be clear, consistently applied and aligned with our international peers.

Two conditions that will help drive competition and support innovation in payments and more specifically, fiat-referenced cryptoassets:

  • A clear and appropriate regulatory and supervisory payments framework and standards that accommodate fiat-referenced cryptoassets and that can adapt as the technology evolves; and
  • Access to financial services for innovators in the digital asset ecosystem.

We also highlighted to OSFI that a regulatory framework should not impede FRFIs from providing financial services to this nascent industry. Any such restriction would hinder responsible payments innovation involving fiat-referenced cryptoassets and may have the unintended consequence of constraining greater competition in payments, to the detriment of Canadian consumers and the Canadian economy. 

The competitiveness of the Canadian dollar is also at stake. Failure to implement an appropriate regulatory framework for fiat-backed cryptoassets in Canada would stifle the development of a Canadian dollar-referenced cryptoasset, thus depriving Canadian businesses and consumers of a digital payment solution for cross-border transactions that offers real-time international payments and settlement. Other currencies would dominate the international payments market and this could undermine the strength of the Canadian dollar.


To wrap it up 

There are numerous well documented deficiencies in the payments space today. Interchange fees. Security. Reconciliation delays. Consumer preference and lack of convenience. We believe these can be improved with the broader use of cryptoassets as payment methods. We believe that regulating fiat-referenced cryptoasset arrangements is a first step towards a future where payments can be secure, immediate, and convenient.

1 OSFI is an independent agency of the Government of Canada reporting to the Minister of Finance. It is the sole regulator of banks, and the primary regulator of insurance companies, trust companies, loan companies and pension plans in Canada.

In our submission to OSFI and in this blog post, we use the term “fiat-referenced cryptoasset” to refer to fiat-referenced cryptoassets pegged to a fiat currency, backed at least one-for-one by cash and cash equivalents and issued by an entity other than a national government. We use the term “stablecoin” to refer to cryptoassets that are designed or otherwise intended to maintain a stable value relative to a specified asset, or a pool or basket of assets, or kept stable using algorithmic smart contracts, usually a national currency such as the US dollar. A fiat-referenced cryptoasset is one type of stablecoin.