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Canada goes hard on algorithmic stablecoin issuers

canada-goes-hard-on-algorithmic-stablecoin-issuers
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Canada goes hard on algorithmic stablecoin issuers

Stablecoins backed by fiat currencies may be exempt from regulation provided their reserves are liquid and undergo monthly audits, according to Canadian watchdogs. This comes as s new report by the CSA reveals a new set of guidelines for crypto entities, most of which were directed to stablecoin issuers.

The Canadian Securities Administrators, comprised of securities regulators from each of Canada’s ten provinces and three territories, compiled a list of new requirements for cryptocurrency companies that wish to remain legally compliant as stablecoin platforms stand in the middle of the agency’s crosshairs.

Algorithmic stablecoins won’t be allowed

Without the previous written authorization of the CSA, crypto asset trading platforms inside the nation will no longer be permitted to enable its consumers to acquire or deposit stablecoins or any other “Value Referenced Crypto Assets” (VRCAs) without approval. To get approval, it is necessary to fulfill the several due diligence criteria imposed by the administrators, one of which is to guarantee that the stablecoin is backed by fiat currency.

The CSA does not anticipate giving their agreement regarding a VRCA that is not entirely supported by a good reserve but instead maintains its value via an algorithm. This is because CSA does not plan to supply such a VRCA.

Canadian authorities choose to use the word VRCA rather than “stablecoin” since several cryptocurrencies that claim to be stable have shown otherwise. For example, TerraUSD (UST), the third-largest stablecoin by market size, lost its peg to the dollar in May last year due to algorithmic issues.

Only “highly liquid assets” (cash and cash equivalents) maintained with a licensed custodian are permitted for trading platforms to facilitate the purchase and sale of such tokens in compliance with the CSA. In addition, independent auditors must evaluate them periodically, and the results must be made public ” timely.”

Stablecoin issuance must comply with Canadian security laws

Since “fiat-backed crypto assets typically fit the definition of security,” distributions of these tokens must likewise adhere to Canadian securities regulations.

In the same vein as fiat-backed crypto assets, CSA would usually regard VRCAs tied to or backed by assets other than fiat money as a security and derivative. 

The CSA acknowledges that stablecoins serve several purposes, including payments and volatility hedging. Still, it also views them as riskier than fiat money, including the currencies permitted for trading on regulated crypto platforms. 

This development on stablecoins comes as the US SEC issued a Wells notice to Paxos earlier this month, stating that Paxos’ BUSD stablecoin is an unregistered security. This claim is widely disputed by those working in the field.

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