The Canadian government and the country’s securities regulators and financial agencies are working on rules for stablecoins, digital assets with value pegged to a government-issued currency.

In an email to The Logic, Finance Minister Chrystia Freeland’s press secretary Adrienne Vaupshas said stablecoin regulations are part of a broader federal legislative review of digital assets announced in the 2022 budget.

“In recent months, both here in Canada and across the world, we have seen how unregulated crypto-assets can impact our economies and our democracies,” Vaupshas said. “As recent volatility in digital currencies has shown, understanding these risks will be critical to ensure the safety and security of Canadians’ finances.”

Stablecoins are the grease that lets the gears of the crypto sector turn. When someone buys a crypto asset on a cryptocurrency-trading platform, a stablecoin typically serves as a bridge, making it possible to trade between various tokens. Stablecoins are also becoming increasingly popular among people in emerging economies who don’t have bank accounts, allowing them to shop online, send money abroad and save money in an asset backed by a currency with a value more stable than that of their home country.

Given their crucial role in the crypto sector and the size of their market capitalization, at about US$147 billion, stablecoins are increasingly coming under regulatory scrutiny. At an event last November, Ontario Securities Commission CEO Grant Vingoe said there’s a “pretty universal” consensus among regulators in North America and internationally that the coordinated regulation of stablecoins is necessary.

The U.K. passed rules  in October that would give stablecoins the same oversight as other parts of the payments industry. In the U.S., lawmakers have repeatedly stalled a bipartisan bill that would regulate stablecoins.

The collapse of the stablecoin TerraUSD in the spring contributed to a massive cryptocurrency sell-off, the effects of which are still being felt. The stablecoin Tether has faced questions for years about the health of its reserves, leading to concerns about what might happen were it to suffer the crypto equivalent of a bank run, as the leading international exchange FTX did before its collapse last week.

Morva Rohani, executive director of the crypto-industry group the Canadian Web3 Council, said in an email to The Logic that she supports rules that ensure stablecoin reserves are transparent and securely stored. She said she also hopes the government will prioritize innovation and competition.

“For example, a regulatory approach that only allowed banks to issue stablecoins would not promote competition in payments,” Rohani said. “We can’t apply old paradigms to a new asset class or we risk driving away innovation and activity.”

Isaac Ru, chief compliance officer at Stablecorp, a joint venture between the cryptocurrency asset manager 3iQ and blockchain-development firm Mavennet, said in an email to The Logic he welcomes regulations. Stablecorp is working on a stablecoin to be issued by VersaBank and backed by the Canadian dollar.

“Especially in the aftermath of recent market events, Stablecorp wants to see a comprehensive and innovation-responsive regulatory framework in Canada,” he said. “Industry participation is key to the successful delivery of a robust regulatory environment that protects our democracy without stifling innovation.”

The government has awarded a contract to Deloitte to help it evaluate the risks digital assets may pose to the financial system and Canadian monetary sovereignty. The Department of Finance will consult with provincial governments and regulators, banks, fintech and crypto companies, payment service providers, business and consumer associations and civil-society groups, among others.

The government’s look at stablecoin regulation is part of the first phase of its legislative review of digital assets. This phase review will also include unbacked cryptocurrencies and central-bank digital currencies, or CBDCs.

The Bank of Canada is conducting its own consultations on the possibility of issuing a CBDC. The central bank is coordinating with the Finance Department and is sharing information as their efforts overlap, spokesperson Alex Paterson confirmed to The Logic in an email.