Bank of Canada Highlights Stablecoin Regulation

On Monday, the Bank of Canada released a Staff Analytical Note on fiat-referenced digital assets. It discusses the risks and the potential benefits of stablecoins.

It further analyses the working mechanism of these crypto assets and explores how they should be distributed. However, the most critical point that staffers discussed is stablecoin regularisation.

Bank of Canada on the usage of fiat-pegged crypto assets

The report says that the global market of fiat-backed cryptocurrencies has seen a 30-fold growth in the past two years. Currently, the estimated value of this market stands at $161 billion. Yet, these coins have limited usage.

It points out that these assets are primarily used on trading platforms as payment options. However, they may have various other use cases for different users. For instance, they can also be adopted as a payment option for goods and services.

However, the authors emphasised that it is only possible with “well-designed and appropriately regulated” stablecoins. The note adds that stablecoins could benefit payment services because of their efficiency. They can also help shape a digitised economy, but safeguarding is essential to eliminate the risk of instability, it says.

The identified risks

The analytical note identified several risks that can cause instability in the financial system. They include run, contagion, concentration, consumer and investor protection, and accountability risks.

Run can happen when fiat-referenced coins lose their peg and cannot be redeemed. A run incident occurred in the market when the Terra-Luna ecosystem collapsed in May.

Similarly, there is a contagion risk because 50% of the trades in the crypto market happen in stablecoins. Most centralised/decentralised exchanges and DeFi platforms are affiliated with these assets. So, if a run happens for a stable asset, the market will likely feel disruption.

Concentration is another issue that can be problematic for investors. The report says that around 90% of the market is dominated by only three stable assets. Only 1% of investors hold more than 90% of these assets.

There are accountability and investor protection issues too. These problems can cause an imbalance in the digitised economy, which is why regulatory measures seem inevitable.