Bank of Canada identifies the regulatory necessity for stablecoins

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Bank of Canada employees published a note on December 19 that examined fiat-referenced cryptocurrency assets. Also known as stablecoins. The note provided an overview of the production and distribution of stablecoins and outlined the benefits and risks. It also expressed support for additional regulation of this crypto asset. It states that although crypto assets with fiat references are primarily used on cryptocurrency trading platforms they can also be used for other purposes. Both stablecoin holders as well as the coins themselves are subject to concentration risk. Because of their concentration, changes to those coins and their holders could have a disproportionately big impact on the economy overall.
“Concentration risk is another risk in the financial system. This refers to both the dominance by a small number fiat-referenced cryptocurrencyassets on the market and the small number entities holding large concentrations. The top three fiat-referenced cryptocurrencyassets currently have 90% of total fiat cryptoasset market.
Tether, USD Coin, and Binance USD account respectively for 44%, 33%, and 13% of this market.10 This highly concentrated nature of these markets and holdings can have outsized impacts if major players are affected by cyberattacks, or a loss in confidence.
According to the note, despite recommendations from international standards-setting organisations, most existing regulatory frameworks in Canada and abroad are not fit for purpose. Its relevance to Canada’s cryptocurrency regulation is undoubtedly what makes it the most fascinating.
“But, some existing regulatory frameworks, in Canada and elsewhere, are entity-based (i.e. they only apply to certain types of entities such as banks), which creates challenges.
…Work is ongoing, both domestically and internationally to create a strong regulatory framework to mitigate the risk these types of cryptoassets pose to holders, the financial sector, and the economy. Canada must adopt a timely and comprehensive regulatory approach to ensure that fiat-referenced cryptocurrencyassets are able to deliver potential benefits without taking unnecessary risks.
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