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On December 3, 2024, Circle Internet Financial, LLC (Circle) became the first stablecoin issuer to file an undertaking (the Circle Undertaking) with the Canadian Securities Administrators (CSA). Circle is the issuer of USDC Coin (USDC), the world's second-largest US-dollar backed stablecoin by market capitalization.1
The Circle Undertaking will allow crypto asset trading platforms that are registered as dealers with the CSA (Registered CTPs) to continue to offer USDC in 2025. In addition, when selling USDC to Canadian clients, Registered CTPs will no longer be subject to the retail purchase limit of C$30,000 per year that has applied to all crypto assets other than Bitcoin, Ether, Litecoin and Bitcoin Cash in most CSA jurisdictions.
The CSA announced their intention to regulate stablecoins, which the CSA refers to as "Value-Referenced Crypto Assets" or "VRCAs", in October 20232, (see our prior blog, CSA announces Interim Conditions for the Trading of Stablecoins (VRCAs)), but have twice delayed implementation of the regime in response to industry concerns that Canada is out of step with global developments. Notably, unlike holders of securities, users do not expect to profit from holding USDC, which is designed to maintain a value that remains stable at 1 USD. Circle's USDC terms of service stipulate that holders are not entitled to any interest or other returns earned on the reserve assets that support the price of USDC3.
In response to industry pleas for more time to facilitate public consultation on a prudential framework for stablecoins, the CSA granted a brief two month extension ending December 31, 2024, and remarked: "While other international jurisdictions are developing payment-based, banking-based or hybrid regulatory regimes for certain types of VRCAs, the CSA is not aware of... any initiatives to develop similar regulatory regimes in Canada"4.
Circle last week filed an undertaking with the CSA prefaced by the following statement: "The Issuer does not...consider USD to be security or derivative...in the United States, the European Union, or in other jurisdictions that have been analyzed by the Issuer. The Issuer considers that USDC would be classified in these jurisdictions as, among other things, a virtual currency, e-money, a payment instrument, stored value, or a commodity".
The Circle Undertaking is an important step that preserves access to USDC for clients of Registered CTPs. However, critical issues around the regulation of stablecoins in Canada remain unresolved.
Payment Service Providers will soon be Prudentially Regulated ... Stablecoin Issuers will Not
The primary use case for stablecoins is payments (as a store of value or a medium of exchange). It is no surprise that VISA makes USDC settlement functionality available to card issuers and merchant acquirers5 and PayPal offers its own US dollar-backed stablecoin, PYUSD, for use on leading public blockchain networks6.
Just last month, the Bank of Canada received the first group of applications7 for registration of payment service providers (PSPs) under the Retail Payments Activities Act (Canada) (RPAA), with the first approvals expected in September 2025. At long last, enterprises (commonly referred to as fintechs, paytechs and payfacs) in the business of providing payment services to Canadians will be subject to prudential oversight by Canada's central bank, including requirements for safeguarding end-user funds, operational risk management and incident response and administrative monetary penalties for non-compliance (see our November 2023 blog for an overview of the PSP regime).
The RPAA addresses a gap in Canada's regulated financial services industry, as technology-driven financial services models and delivery channels have experienced ubiquitous Canadian user adoption. The new regime catches Canada up with other countries, as PSPs have been required to register in the United Kingdom, European Union and Australia for at least a decade, and most U.S. states maintain prudential licensing regimes for money transmitters. Recent Bank of Canada guidance confirms that payment gateways, e-wallets and remittance services are generally in scope (details in our August 2024 blog) and clarifies that holding funds "at rest" on behalf of end users is a key determining factor (details in our October 2024 blog).
As a prudential framework that is specifically designed to protect retail consumers receiving electronic payment services, PSP registration seems well-suited for issuers of digital tokens backed by fiat reserves on a 1:1 basis. However, retail payment activities are only in scope of the RPAA if they relate to an electronic funds transfer made in fiat currency or "a unit that meets prescribed criteria". While fiat-backed stablecoins could be prescribed as "units" under this definition, the federal government has declined to do so since the RPAA was enacted in 2021. In October 2024, the Bank of Canada clarified that cryptocurrency service providers are not subject to the RPAA, even in respect of incidental fiat payment services provided to support their core cryptocurrency business8.
While stablecoins are becoming regulated under electronic money regimes or new prudential frameworks in other jurisdictions9 and the Canadian crypto asset industry has advocated for inclusion of stablecoin services within scope of the PSP regime10, transfers of fiat-backed stablecoins are not considered regulated "payment functions" under the RPAA.
If stablecoin issuers were regulated as PSPs in Canada, their reserves would be subject to operational safeguards to ensure that end-users have reliable access to their funds without delay, and their activities would be supervised directly by the Bank of Canada. This prudential framework would seem to provide more robust consumer protection than the disclosure-based regime introduced by the CSA. It would also protect all stablecoin users in Canada, not only those who hold their stablecoins in an account with a Registered CTP.
So where do we go from here?
The RPAA provides a prudential framework for regulating electronic payment activities, prefaced by Parliament's recognition that, "it is desirable and in the national interest to supervise and regulate retail payment activities...in order to foster competition and innovation in payment services by building confidence in the retail payment sector"11.
We encourage the CSA, federal financial services regulators and all levels of government to work with the crypto asset industry to ensure that our long-term regulatory framework allows Canada to fully participate in the payments innovation that stablecoins represent.
In addition, the CSA should ensure that its interim framework provides a level playing field to Canadian and foreign stablecoin issuers to facilitate access by Canadian users to a digital token denominated in our local currency. In the global context, Canada is touted as a model for financial stability. To also be seen as a global model in innovation, Canadians should experience the same ease (not less) when transacting online in Canadian dollars as USDC provides for US dollars. At the same time, the federal government should explore the potential to bring stablecoins in scope of the RPAA or similar prudential regulation.
We are optimistic that these steps will provide necessary regulatory clarity to avoid chilling the adoption of stablecoins for payments in Canada, while taking time to develop an appropriate long-term regime.
Footnotes
1. Based on the VISA Onchain Analytics Dashboard at: https://visaonchainanalytics.com/supply.
2. CSA Staff Notice 21-333 Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-Referenced Crypto Assets with Clients (October 5, 2023) (CSA SN 21-333).
3. USDC Terms of Service: https://www.circle.com/legal/usdc-terms.
4. CSA news release: CSA provides update to crypto asset trading platforms about value-referenced crypto assets (September 26, 2024) (CSA Sept 24 Release).
5. VISA news release: Visa Expands Stablecoin Settlement Capabilities to Merchant Acquirers (September 5, 2023). Also see Making sense of stablecoins: Onchain analytics can help financial institutions cut through complexity, Cuy Sheffield, Head of Crypto, VISA, April 25, 2024.
6. See PayPal's description of PyUSD on its website: https://www.paypal.com/us/digital-wallet/manage-money/crypto/pyusd. PYUSD is not available through the PayPal app in Canada.
7. The Bank of Canada has published the list of PSP applicants here - Retail payment supervision: List of applicants. There are over 1000 applicants, including many fintechs, paytechs and payfacs.
8. Bank of Canda guidance: Case scenarios about providers of services backed by cryptocurrencies (October 2, 2024).
9. The Canadian Web3 Council'sIndustry Response - CSA Staff Notice 21-333 (February 5, 2024) (CW3 Paper) describes prudential approaches to stablecoin regulation in the European Union, Singapore, United States (draft legislation under consideration by the House Financial Services Committee of the U.S. Congress), United Kingdom and Hong Kong. Additionally, the Australian government's PSP modernization initiative, which is a functions-based prudential approach very similar to the inaugural RPAA in Canada, specifically includes "payment stablecoin stored value facilities" as a regulated payment function. See the Australian Government's factsheet: Regulation of Payment Service Providers and consultation paper: Payments System Modernization: Regulation of Payment Service Providers (December 2023).
10. Report of the Standing Committee on Industry and Technology of the House of Commons, Blockchain Technology: Cryptocurrencies and Beyond, 44th Parliament, 1st Session, June 2023, page 35. See also CW3 Paper.
11. Retail Payment Activities Act, S.C. 2021, c. 23, s. 177, Preamble.
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