A group of prominent Canadian crypto companies that includes Wealthsimple, Coinsquare and WonderFi is pushing back against regulators’ plans to treat stablecoins as securities, The Logic has learned, setting up a potential showdown over the controversial digital asset.

Stablecoins are tokens whose value is pegged to that of another asset outside the crypto world, typically the U.S. dollar. With an estimated global value of US$133 billion—up from about US$63 billion in March 2021—they are systemically important to crypto markets, playing a key role in blockchain-based decentralized finance and facilitating trading between various tokens on cryptocurrency-trading platforms. 

Stablecoins can also be used for consumer payments without a bank account, with some suggesting they could promote financial inclusion in emerging economies.

In a letter sent Thursday to the Canadian Securities Administrators, the umbrella group for the country’s provincial and territorial securities regulators, 13 crypto businesses operating in Canada, as well as the Canadian Web3 Council, a crypto industry association, called on the CSA to reconsider its position that stablecoins “generally meet the definition of ‘security’.” 

The letter expresses concern about the CSA’s lack of consultation with the industry and the varying compliance deadlines faced by businesses operating in different provinces, asking for an urgent meeting to address their concerns.

Morva Rohani, executive director of the CW3, said the letter was timed in response to inquiries the Ontario Securities Commission made of some crypto companies earlier this month. Rohani said the OSC gave crypto businesses until March 24 to explain how they intend to comply with guidance on stablecoins that the CSA issued in February.

According to the guidance, platforms must get written consent from the CSA to offer stablecoins to clients. It lays out 12 criteria the stablecoins must meet and states the CSA “would not expect to provide consent” for algorithmic stablecoins, which maintain their value through blockchain-based software contracts rather than by holding reserves.

Rohani said the OSC is asking too much in too short a timeframe, and that most crypto platforms did not submit the requested information by the deadline. “As far as our membership, as well as the signatories to the letter are concerned, there hasn’t been enough industry consultation and enough information for them to be able to realistically comply,” she said.

The signatories to the letter are taking a risk. The fate of Kik, which was a darling of the Canadian tech community until a U.S. Securities and Exchange Commission lawsuit over its crypto token Kin cost it millions of dollars and led to the layoff of all but a skeleton staff in 2019, serves as a reminder of how badly things can go when regulators crack down on a crypto product they deem to be an illegal securities offering.

Rohani said she believes regulators are unlikely to respond with enforcement action, which could include fines or restrictions on offering products to Canadians, but that the risk is worth taking in order to make the industry’s position clear. “We’re ready for it, but we’re not too worried about it,” she said.

Asked for comment, the OSC referred The Logic to the CSA. In an emailed statement, CSA spokesperson Ilana Kelemen did not address a question asking at what point the regulator would consider enforcement action against platforms that continue to offer stablecoins to Canadians without permission.

Kelemen reiterated the CSA’s view that stablecoins “generally appear to meet the definition of security and/or derivative.” 

“We are aware of the assertions that [stablecoins] have the potential to be widely used as a form of retail payment, but our present understanding is that they are not,” she said.

Wealthsimple, which has stood out among its competitors for its willingness to work with regulators on its crypto offerings, is a notable signatory to the letter. The Power Corporation-backed fintech was the first—and for a time, to its frustration, the only—platform to register its crypto business with Canadian securities regulators until a push to bring its peers into compliance began in the spring of 2021.

Asked if Wealthsimple’s participation in the letter marks a change in approach, Wealthsimple Crypto head of legal Evan Thomas said in an emailed statement, “We look forward to continued dialogue between regulators and industry to build on Canada’s leadership to date.”

Regulators in Canada and around the world have expressed concern about stablecoins, citing consumer protection, money laundering and the risks inherent in blockchains becoming systemically important to global payments and financial settlement.

Those concerns are not just theoretical. The collapse of the stablecoin TerraUSD sparked a massive crypto price crash and related contagion in the summer of 2022. Earlier this month, the stablecoin USDC temporarily lost its peg to the U.S. dollar after holders learned its issuer Circle had kept some of the funds backing it at the recently collapsed Silicon Valley Bank and rushed to redeem their tokens, causing ripple effects throughout DeFi markets.

“You want to have good regulations so that you don’t have failures,” said John Paul Koning, a Montreal-based financial writer and CoinDesk columnist. “You don’t want a bunch of Canadians to be using stablecoins, and all of a sudden, the stablecoin collapses.”

The industry’s letter acknowledges these concerns and voices support for regulation, but argues treating stablecoins as securities is the wrong way to go about it. “We propose that instead of asserting that stablecoins are securities or derivatives, the CSA and its members should work with [platforms] and other stakeholders to find ways of enhancing the existing product due diligence and disclosure requirements under the existing … regulatory framework,” it reads.

The CSA’s attempt to impose rules on platforms offering stablecoins makes Canada a trailblazer in crypto regulation once again. Canada’s approach of allowing crypto products and services as long as they submit to strict rules and oversight stands in contrast with more heavy-handed tactics in the U.S.

The SEC has told the crypto firm Paxos it may face enforcement action over its Binance-linked stablecoin BUSD. It has also accused Do Kwon and his company Terraform of “orchestrating a multibillion-dollar crypto-asset securities fraud” using TerraUSD.

The legal definition of a security is broader in Canada than it is in the U.S., including “evidence of indebtedness.” That means even products that are not purchased with the expectation of making a profit—like stablecoins—can potentially fall under the jurisdiction of securities regulators.

Issuing and selling securities to the public in Canada means following strict—and expensive—rules and registration procedures. While the Canadian sector isn’t facing an outright ban, the CSA’s guidance has sent crypto businesses scrambling.

All nine Canadian crypto-trading platforms that have registered with securities regulators offer USDC, a stablecoin backed by a reserve of cash and short-dated U.S. treasuries issued by Boston, Mass.-based fintech Circle. Five of them currently offer Dai, which is collateralized by a basket of cryptocurrencies and stablecoins and has been described as a “hybrid algorithmic stablecoin.”

Toronto-based Newton and Calgary-based Bitvo offer QCAD, a Canadian dollar stablecoin issued by Stablecorp, a joint venture between the cryptocurrency asset manager 3iQ and blockchain-development firm Mavennet. Tether, the largest stablecoin by market capitalization, was already effectively barred by Canadian regulators.

Anna Trinh, chief compliance officer at Vancouver-based crypto-liquidity provider Aquanow, said the guidance has put her company in a tough position. Aquanow sources many of the crypto assets that Canadian platforms list and has a policy of never offering tokens that are securities in order to avoid running afoul of registration requirements, she said.

Now, that policy has run into a complication. Trinh said Aquanow will continue to rely on the platforms to do due diligence in determining whether the tokens they want to offer are securities or not, but a definitive ruling that stablecoins are securities might mean the company has to stop offering them in Canada.

“I think the intention was to provide some clarity. But there’s too much of a ripple effect,” she said. “Trying to provide clarity ended up muddying the waters.”