On December 12, 2022, the CSA announced stricter requirements for pre-registration undertakings[1] for cryptoexchanges operating in Canada. The expanded conditions include a ban on margin or leverage trading by Canadian customers, as well as a requirement to safekeep assets with an appropriate (i.e., regulated) custodian.[2]
Notably, the CSA announcement also mentioned stablecoins, stating that “the CSA is of the view that stablecoins, or stablecoin arrangements, may constitute securities and/or derivatives”. This is the first time the CSA has directly addressed the regulatory treatment of stablecoins.[3] By assessing that stablecoins could qualify as securities and/or derivatives, provincial regulators are seeking to increase their oversight in an area rife with regulatory gaps.
In America, there is a live debate about how best to regulate stablecoins. The issue invokes jurisdictional issues that complicates oversight. According to some commentators, regulation of stablecoin issuance (state and federal banking regulators)is distinguishable from regulation of stablecoin trading and exchange (SEC and CFTC). Proposed Congressional legislation has suggested assigning stablecoins to the CFTC or the OCC, as the jurisdictional debate rages on.
In Canada, the debate about stablecoin regulation has been more muted, though it is picking up pace due to recent crypto calamities.
As the same time as the CSA hinted that stablecoins fall within provincial jurisdiction, the Bank of Canada has suggested there is also a place for federal jurisdiction. In December 2022, the Bank of Canada issued a report highlighting the risks and benefits of stablecoins[4]. The report recommended a “timely and comprehensive regulatory approach” to stablecoins that would counter their threats to the stability of the financial system (e.g., run and contagion risks), as well as anti-money laundering and counter-terrorist financing (AML/CTF) risks. In Canada, risks to the financial system and AML/CTF concerns are regulated federally (by the OSFI and FATF), and therefore managing these risks would invoke federal jurisdiction.
At some point, provincial and federal regulators in Canada will have to sit down and stake out their territories. With ominous predictions of a “coin that could wreck crypto” (as the NYT put it), that time should come sooner rather than later.
[1] Such undertakings are promises by cryptoexchanges to abide by certain conditions, barring which they would face enforcement action.
[2] Details on the original list of conditions in the pre-registration undertakings are discussed here.
[3] The CSA had briefly touched on stablecoins in its CSA Staff Notice 51-363 dated March 11, 2021, “Observations on Disclosure by Crypto Assets Reporting Issuers”, where it categorized these as a type of digital assets, though without clarifying their regulatory treatment.
[4] The Bank of Canada report uses the term “fiat-referenced cryptoassets” rather than the colloquial “stablecoin” to underscore that many such assets are anything but stable.