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The Bank of Canada Stress the Importance of Stablecoin Regulation

Between the beginning of 2020 and the middle of 2022, the global market for crypto assets that are tied to fiat money grew by a factor of 30x.

Photo by Ferran Fusalba Roselló / Unsplash

On December 20th, the Bank of Canada published (1) an analytical report on fiat-referenced cryptocurrency assets, more commonly referred to as stablecoins.

The note mentions that the writers back more regulation for crypto assets and a review of the processes for establishing and distributing stablecoins. In addition, it gives a rundown of the potential upsides and downsides.

The worldwide economy for fiat-referenced crypto assets reached $161 billion by the middle of 2022, having expanded by a factor of 30 between the beginning of 2020 and the middle of 2022.

According to the note, its most common application is on markets for exchanging cryptocurrencies. However, they also offer the potential for many other applications, particularly when combined with smart contracts.

Especially in an economy that is becoming increasingly digitalized, the introduction of these digital currencies could bring better levels of efficiency and competition to the payment services industry.

However, in the absence of appropriate safeguards, they could substantially threaten the integrity of the financial system.

At this time, 90 % of the total market for fiat-referenced cryptocurrencies is controlled by the top three fiat-referenced crypto assets. Similarly, the top one percent of investors possess ninety percent or more of the available quantity of major fiat-backed cryptocurrency assets.

Because of this concentration, any changes that affect those coins or their holders could have a disproportionately large effect on the economy.

Current Regulatory Regime Insufficient

The explanatory note also asserts that most current regulatory norms in Canada or elsewhere are not sufficiently fit to start executing such activities, despite getting recommendations from global benchmark bodies regarding the oversight of liquidity crypto assets. This is stated even though the regulatory regimes in question have existed for quite some time.

According to the report, a comprehensive and timely policy environment in Canada will ensure that fiat-referenced crypto investments can bring possible benefits while trying to pose unnecessary risks, which concludes that the current regulatory frameworks and interim measures have been outlined in a condensed form.

The "Encouraging the Growth of the Cryptoasset Sector Act," also known as Bill C-249, was introduced (2) into the Canadian House of Commons in February of this year. Even though a significant portion of the local crypto community favored the law, it became politically divisive and was effectively shelved (3) quickly.