As Canada turns to stablecoin regulation, Scotiabank argued the move is unlikely to shake up domestic markets.
Any framework is really about upgrading payment speed, efficiency and 24/7 settlement, rather than managing systemic risk, economist Derek Holt wrote in last week’s report.
In November, the government committed to legislation that will regulate stablecoins backed by the Canadian dollar. It follows in the footsteps of the United States, which passed a law to govern stablecoin issuers in recent months.
Stablecoins are cryptocurrencies whose value is tied to another asset, such as fiat currency or gold. They play a major role in the cryptocurrency markets and they provide a payment infrastructure and are also used to transfer money internationally. Tethers USDT is the largest stablecoin followed by USDC, issued by Circle Internet (CRCL).
Those cryptocurrencies have surged in the U.S., led by Tether’s roughly $185 billion footprint, Holt said.
Stablecoin issuers mostly park reserves in short-term government bonds, repo and money market funds with bitcoin and gold penetrates. That mix has drawn attention because a run could force asset liquidations, the report noted.
S&P recently cut its rating on Tether’s ability to hold its peg to the low end of its scale, while Circle’s peg looks more stable as a result of its tighter fiscal focus. Without access to the Federal Reserve’s backstops, issuers would have limited defenses in a stress event, Holt wrote.
Still, the economist emphasized that this is not a repeat of historical peg failures. Stablecoins remain a small part of global finance, although long-term projections envision trillion-dollar reserve pools that could eventually have financial market implications. And while US officials say stablecoins bolster the dollar’s reach, he warned that fiscal slippage or issuer-level imbalances could make that support fragile.
For Canada, the bank sees the real dividend in cross-border payments. Stablecoins could reduce costs, narrow liquidity premiums and offer round-the-clock settlement, provided issuers remain sound, it said.
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