Last month, the New York Stock Exchange announced it’s building a blockchain-based platform to enable 24/7 trading of tokenized stocks and ETFs (exchange-traded funds). Tokenization converts traditional financial assets into digital tokens on a blockchain, allowing them to be traded and settled using stablecoins and tokenized bank deposits rather than through conventional payment systems. NASDAQ is pursuing similar plans.
A world is not far off in which finance operates around the clock, settles instantly, and runs on programmable digital money. In a new C.D. Howe Institute commentary, we argue that Canada needs a two-track regulatory framework to navigate the transition to these new forms of trading.
Track 1 would govern “pure payment” stablecoins — digital tokens fully backed by high-quality liquid assets under Bank of Canada oversight. Track 2 would cover tokenized bank deposits, which would continue to be supervised by the Office of the Superintendent of Financial Institutions and its provincial counterparts. Why two tracks? Because regulation should not treat a stablecoin designed for payments as a stock or ETF, while a tokenized bank deposit should retain all the benefits and protections Canadians currently receive from their bank accounts.
Policy-makers should also reconsider the prohibition of interest payments in the proposed “Stablecoin Act.” Issuers will find ways to pass value to holders — think free toasters, or today’s equivalent: rewards programs and fee waivers. The interest prohibition merely adds complexity Ma. And it may limit the competitive appeal of C$ stablecoins relative to U.S. alternatives. The Americans’ GENIUS Act also bans interest payments but exchange platforms like Coinbase already offer yields exceeding four per cent on US$ stablecoins held with them.
Canada’s early history warns against allowing money of different values to be used for payment. The wide variety of coins in circulation before the introduction of paper money complicated trade and caused confusion. The same was true during America’s “Free Banking Era” from 1836 to 1865. State banks issued competing currencies that traded at varying discounts; roughly a third of currency was counterfeit; and financial panics were common.
Modern technology would reduce the informational problem: real-time exchange rates are trivial to compute. But when money itself isn’t fully fungible every transaction would carry some settlement risk, liquidity would be fragmented across platforms, and the possibility of a stablecoin de-pegging — as occurred with TerraUSD in 2022 — could trigger broader instability. Even small frictions, multiplied across millions of daily transactions, would become a meaningful drag on economic activity. Privately issued stablecoins — backed by different reserves and operating on different platforms — would risk recreating this fragmentation in digital form. A CBDC could help prevent this. It would provide a neutral settlement layer between competing stablecoin issuers and a public interested in converting stablecoins to central bank money, all without necessarily having to involve a commercial bank in the process.
The United States so far has rejected this path. The GENIUS Act provides a framework for private stablecoin issuers but without a CBDC component. Canada could therefore offer something American stablecoins don’t: integration with central bank money that provides superior stability and a settlement layer backed by the Canadian government, thus ensuring a Canadian dollar would be worth a Canadian dollar no matter who issued the digital token representing it.
We also recommend extending access to Bank of Canada liquidity facilities to regulated issuers of stablecoins linked to the C$ on the same basis as to deposit-taking institutions. This would allow issuers to pledge reserve assets as collateral during redemption surges rather than sell them in ways that could exacerbate market strains. The U.S. Federal Reserve does not extend such facilities to stablecoin issuers, so this would be another potential competitive advantage for C$-linked stablecoins.
The Bank of Canada paused its work on CBDCs in 2024, citing privacy concerns. Such concerns clearly deserve attention. But they could be addressed with a “wholesale CBDC,” available only to financial institutions and regulated stablecoin issuers, that would obviate individual-level retail privacy concerns. It would make both cross-stablecoin transactions and conversions between stablecoins and traditional bank deposits easier and safer for users and help ensure a dollar is always worth a dollar.
Network effects in payment systems generally reward first-movers so the window for action is narrowing. The NYSE and NASDAQ announcements signal that tokenization and instant settlement are becoming mainstream. Canada’s Stablecoin Act is a necessary first step, but how the supporting regulatory infrastructure is designed and implemented will determine whether we can help shape this future or merely react to it.
Peter MacKenzie is a senior policy analyst at the C.D. Howe Institute, where Mark Zelmer is a fellow-in-residence.