Canadian regulators consider stablecoins “generally securities”: What does this mean for Tether, USDC

The Canadian Securities Administrators recognize use cases for stablecoins backed by fiat currencies, however they consider these cryptocurrencies as securities. The term used by the CSA is Value Referenced Crypto Assets (VRCA). 

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Canadian authorities crackdown on stablecoins, what this means for fiat-backed and algorithmic stables

After the United States’ recent regulatory crackdown on cryptocurrencies and stablecoins, Canadian regulators have recognized the need for regulating fiat-backed assets. While the CSA recognizes use cases for stablecoins such as payments and volatility hedging, it considers them riskier than fiat currency. 

The CSA requires the distribution of fiat-backed stablecoins to comply with Canadian securities legislation since the legislation’s notice reads, “fiat-backed crypto assets generally meet the definition of security.” 

While fiat-backed stablecoins could be regulated as securities, the same is not true for algorithmic stables like FRAX and DAI. The requirements for VRCAs are liquid and monthly audited reserves, this cannot be met by algorithmic stablecoins, posing a challenge for their legalization and adoption in Canada. 

Tether and USDC face the challenge of monthly audits and public proof-of-reserves

The CSA has opened doors for regulating fiat-backed large market capitalization stablecoins like Tether and USDC, however this could pose a challenge for the former as it requires frequent audits to check for liquidity and public proof-of-reserves. 

Trading platforms engaging in the purchase and sale of Tether, USDC and other fiat-backed stablecoins will need “highly liquid asset” holdings, that include cash and cash equivalents and an eligible custodian. These platforms must undergo monthly review by independent auditors and must be made public “in due course.”

Did Canada officially shut the door on algorithmic stablecoins like FRAX and DAI?

The Canadian securities law considers fiat-backed cryptocurrencies as assets that generally meet the definition of a security. However, even if consensus is reached somehow, the definition is less flexible for algorithmic stablecoins.

This makes it challenging for holders of algorithmic stablecoins like FRAX and DAI. It remains to be seen how stablecoins that have no fiat or cash backing react to the development since the update could negatively influence FRAX and DAI adoption in Canada.