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Introduction
The recent announcement by Binance, a prominent cryptocurrency exchange, about its decision to exit the Canadian market has raised significant interest in the relationship between cryptocurrency and Canadian securities. The driving factor behind this move is the introduction of new regulations by the Canadian Securities Administrators (CSA) that affect the trading of stablecoins. The CSA recently introduced new Pre-Registration Undertakings (PRUs) that will apply to crypto asset trading platforms (CTPs) awaiting registration under securities legislation. The CSA Staff Notice 21-332 Crypto Asset Trading Platforms: Pre-Registration Undertakings Changes to Enhance Canadian Investor Protection (the Notice) was published on February 22, 2023 and put out additional requirements for enhance PRUS. These enhancements included, among others, restrictions on trading stablecoins. While there are other changes and requirements under the Notice, this article focuses on the understanding and the impact on stablecoins.
Understanding Stablecoins in Cryptocurrency
Stablecoins are a type of cryptocurrency designed to maintain price stability and reduce volatility. They have gained popularity as an alternative to highly volatile cryptocurrencies like Bitcoin, offering users a more stable store of value. Stablecoins can be pegged to different assets, such as fiat currencies or commodities, and are backed by reserves held by custodians, which is done through a smart contract system, or through real-world assets, such as gold, silver, or oil.
Stablecoins offer a number of benefits to users in the cryptocurrency space. They have low volatility and can provide a more stable store of value compared to traditional cryptocurrencies. This makes them attractive for trading and hedging purposes, as well as allowing users to easily transfer between different types of assets without having to worry about exchange rate fluctuations.
Stablecoins also make it easier for users to move into and out of cryptocurrency markets quickly, providing liquidity when needed. This is especially important in times of market volatility, enabling users to access their funds instantly if they need them. For businesses looking to accept payments in cryptocurrencies, stablecoins can be a great solution as they are less volatile than other types of digital currencies.
In addition, stablecoins provide a number of advantages for developers looking to build decentralized applications (dApps) on the blockchain. They can be used as a store of value within the dApp and are attractive to users who may not want their funds subject to wild price swings. Furthermore, they can act as an intermediary currency between different blockchains, allowing developers to transfer tokens between them without having to worry about exchange rate fluctuations or fees associated with traditional exchanges.
Stablecoins offer numerous benefits and make it easier for users and businesses alike to move in and out of cryptocurrency markets when needed. With their low volatility and ability to provide instant liquidity, these digital assets can help create greater stability in the market while making it easier for users to access and use digital tokens. Stablecoins provide a layer of stability that is needed to ensure the long-term success of cryptocurrency adoption, providing users with more confidence when investing in the digital asset market.
The Notice and Regulation of Stablecoins
The CSA's Notice introducered regulatory requirements for stablecoins, referred to as "Value-Referenced Crypto Assets" (VRCAs). The Notice emphasizes that the term "stablecoin" can be misleading due to instances where assets claiming to be stablecoins did not maintain their peg on trading platforms.
The CSA's concerns revolve around investor protection, transparency of reserves, stabilization mechanisms, and governance of VRCAs. The notice indicates that stablecoins may be classified as securities and/or derivatives. Trading platforms must obtain prior written consent from the CSA to trade stablecoins and comply with various requirements to mitigate risks including the largest risk: the redemption or “run” risk. A "run" risk occurs when a large number of holders simultaneously request the redemption of their stablecoin tokens for the underlying assets (such as fiat currency) or demand access to the reserves that back the stablecoin. If the issuer is unable to meet these redemption requests promptly and in full, it can create a crisis of confidence and lead to a loss of value or even the collapse of the stablecoin.
Per the Notice, the CTP must ascertain written consent from the CSA to enter into crypto contracts to buy or deposit a particular VRCA by ensuring that the VRCAs:
Are a Fiat-Backed Crypto Asset;
Where distributions of the Fiat-Backed Crypto Asset are made in Canada, these distributions must comply with Canadian securities legislation;
The issuer of the Fiat-Backed Crypto Asset must maintain a reserve of assets with a market value at least equal to the value of outstanding units of the Fiat-Backed Crypto Asset at the end of each day;
The reserve of assets is comprised of highly liquid assets, such as cash or cash equivalents;
The reserve of assets is held by a qualified custodian in favour of the Fiat-Backed Crypto Asset holders;
The reserve of assets is segregated from assets of the issuer and the assets of each class of other crypto asset issued by the issuer;
The reserve of assets is subject to a monthly attestation and an annual audit from an independent auditor, copies of which are made publicly accessible in a timely manner;
The redemption rights of the VRCA holder, directly or indirectly, against the issuer of the Fiat-Backed Crypto Asset, or the reserve of assets, are clearly articulated in policies and procedures and publicly disclosed;
The issuer of the Fiat-Backed Crypto Asset maintains a plan for recovery and to support an orderly wind-down in case of a crisis or failure by the issuer or an affiliate of the issuer;
The issuer of the Fiat-Backed Crypto Asset maintains effective governance practices;
Key accurate information about the Fiat-Backed Crypto Asset is made publicly accessible in plain and non-technical language; and
The CTP is not otherwise prohibited from allowing clients to enter into crypto contracts in respect of the Fiat-Backed Crypto Asset.
Binance’s Exit from Canada
Many cryptocurrency advocates around the world have often resisted these types of regulations because they increase the costs and burdens on the business, including reporting requirements, while stifling innovation. These regulations severally limit and reduce the way that the CPAs can operate and use stablecoins for their business. Additionally, these regulations undercut the ethos of cryptocurrencies, which is to create a financial system that is separate from the banker and the regulator. Stablecoins and other cryptocurrencies like Bitcoin are meant to be a self-governing and self-policing technology, where every transaction is visible on the blockchain.
Due to the aforementioned regulations and the concerns expressed above, Binance made the decision to withdraw from the Canadian cryptocurrency market on May 12, 2023. This exit of Binance poses a significant risk to the growth and development of the cryptocurrency industry within Canada.
Relationship with the Bank Of Canada’s Digital Currency
The interaction between stablecoins and the Bank of Canada's Digital Currency is a significant concern highlighted by the Notice and Binance's decision to withdraw from the Canadian market. In 2021, the Bank of Canada published a report titled "Central Bank Digital Currency and Stablecoins," exploring the dynamics between stablecoins and the country's digital currency. Interestingly, the report points out that stablecoins have the potential to undermine the effectiveness of monetary policy while emphasizing the importance of the central bank's digital currency in maintaining competitiveness with private alternatives.
A recent op-ed on CNBC titled "Stablecoin is the future of virtual payments. How wise regulation can foster its growth" delved into the potential relationship between central bank digital currencies and stablecoins. The article discusses how jurisdictions like China and possibly the EU may aim to maintain quasi-monopoly control over digital currencies through their central banks by restricting the presence of stablecoins in the economy. The recent Canadian regulations, including the Notice, appear to align with this trend. The concern of excessive regulation on stablecoins to the point of hindering their operations and creating a quasi-monopoly for the Canadian central bank digital currency seems to be an underlying strategy reflected in the Notice and the resulting exit of Binance from Canada.
Conclusion
The exit of Binance from the Canadian market highlights the impact of regulations on stablecoins and their potential consequences for the cryptocurrency industry. While regulations aim to enhance investor protection, the concerns surrounding the stifling of innovation and the impact on decentralized financial systems should also be considered. The relationship between stablecoins and central bank digital currencies further shapes this landscape, raising important questions about the future of cryptocurrency regulations in Canada.
Andrew Roy Legal will continue to monitor and report on developments in this area. Do you have questions about cryptocurrency, digital currencies, or blockchain technology? Contact us today to learn more about how we can assist you.
The information in this article is not legal advice and does not establish an attorney-client relationship.
© 2023 Andrew Roy