Canada’s regulators have dropped a new list of rules for crypto firms operating in the country, and algorithmic stablecoins aren’t making the cut. The Canadian Securities Administrators (CSA) has published a long list of compliances for crypto firms who wish to keep conducting business legally in the country.
The CSA, made up of securities regulators across all 10 provinces and 3 territories in Canada, has made up their mind about stablecoin platforms, and it’s looking fairly grim.
All digital asset and crypto trading platforms within Canada will be prohibited from allowing customers buy or deposit stablecoins – algorithmic stablecoins or other “Value Referenced Crypto Assets” (VRCAs) – without prior written consent from the CSA, according to the notice published Wednesday.
To obtain consent to buy or deposit stablecoins, Canadians must meet the CSA’s due diligence requirements – including ensuring that such stablecoins are fiat-backed.
“For greater certainty, we would not expect to provide consent in respect of a VRCA that is not fully backed by an appropriate reserve but rather maintains its value through an algorithm,” wrote the CSA.
Stablecoins are cryptocurrencies that reference and maintain “stable” value, usually in the form of a nonvolatile asset like a fiat currency. Stablecoin values are designed so that their value is relatively “stable”, following the currency that they are “pegged” to. Stablecoins are often used in payments, and for volatility hedging.
In reference to the notice, the CSA prefers to use the term “Value Referenced Crypto Assets” – instead of algorthmic stablecoins – as some so-called “stablecoins” haven’t been living up to their name of stability, causing regulators to be sceptical about them.
For a stablecoin to be approved by the CSA for buying and selling, trading platforms must maintain reserves of “highly liquid assets”, made up of cash and cash equivalents, whenever applicable. In addition, these reserves must be maintained and held with a qualified custodian, and are subject to monthly review by independent auditors, to be made publicly available in a “timely manner.”
Distribution of CSA-approved stablecoins must also comply with Canadian securities legislation, as the notice describes that “fiat-backed crypto assets generally meet the definition of security.” If algorithmic stablecoins, or VCRAs managed to get approval, they still would have to comply under the same rules.
“Similar to fiat-backed crypto assets, we would generally consider VRCAs pegged to or backed by assets other than fiat currency to be a security and/or derivative,” the notice writes. This definition would also include assets backed by other cryptocurrencies, such as Wrapped Bitcoin (WBTC).
In general, the CSA considers stablecoins riskier than fiat currencies, including the ones that they have yet to approve. “Any consent given should not be viewed as a statement that the VRCA has been distributed in accordance with Canadian securities legislation,” it wrote.
The collapse of TerraUSD (UST) last May was the first stablecoin collapse that regulators took note of. After the former third-largest stablecoin by market cap completely lost its peg to the dollar due to technical flaws in its algorithmic peg, the crypto market was sent to a shock where its ripples can still be felt today.
Stablecoins however are still popular, especially their more traditional fiat-backed counterparts. Stablecoins like USDT, USDC, and BUSD retain a stable price, and use fiat-based reserves to offer constant convertibility for the coins.
Meanwhile next door in the United States, the Securities and Exchange Commission (SEC) has launched a war on crypto at large, with stablecoins included in the strife. Mid February, the SEC alleged that regulated firm Paxos’s listing of the BUSD stablecoin is an act of trading an unregistered security – resulting in an notice for enforcement action that Paxos is prepared to “vigorously litigate” if the time comes.