February 16, 2023 – Stablecoins require a comprehensive regulatory framework to reap their full benefits and protect against illicit activities and systemic financial risk, according to a new C.D. Howe Institute report.
In “Stablecoins: Sailing without a Rudder,” authors Jeremy Kronick and Mark Zelmer recommend developing a well-designed regulatory framework and modernizing Canada's financial and payment systems to realize the full potential of stablecoins. They argue that this can be done without reinventing the wheel by subjecting stablecoins used for payment purposes to the same type of oversight that is imposed on conventional payment activities.
“Stablecoins are unlikely to reap their potential as payment vehicles unless they are properly regulated,” say Zelmer and Kronick. “In the absence of proper regulation, it is just too tempting for some stablecoin issuers to underinvest in supporting infrastructure and look for ways to enhance their profits in the short-run by backing their stablecoins with assets that are not sufficiently safe or liquid to be able to hold their value in good times and bad.”
In the absence of such regulation, Canadians are unlikely to have enough confidence in stablecoins to use them for most of their payments for goods and services. In turn, this could potentially cause the Canadian payments system to lag behind those of other jurisdictions and hinder Canada’s international competitiveness.
Despite stumbling in 2022, stablecoin growth has been impressive over the last few years. Stablecoins represent about 15 percent of the global crypto currency market and have a collective market capitalization of US $140 billion.
Stablecoins offer the potential of cheaper, virtually instantaneous transactions, which would be a boon to both domestic and cross-border economic activity. To maximize these potential benefits, it is imperative that policymakers introduce a regulatory framework that will guide the further development of a stablecoin market while safeguarding against unnecessary risks, say the authors.
The authors summarize the international Financial Stability Board’s high-level recommendations for global stablecoins – many of which apply in a domestic setting as well – and offer advice on how they could be adapted to the Canadian context.
“Privately issued stablecoins based on new blockchain technology offer the promise of major gains in the processing of payments, especially for those that cross national borders,” state the authors. “We need to move quickly in developing and implementing a domestic regulatory framework for these transactions if we wish to set the stage for a flourishing sound crypto-based payments system to emerge in Canada.”
For more information contact: Jeremy Kronick, Director, Monetary and Financial Services Research, C.D. Howe Institute; Mark Zelmer, Senior Fellow, C.D. Howe Institute, and former Deputy Superintendent of Financial Institutions; and Lauren Malyk, Communications Officer, C.D. Howe Institute, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.