Banks, regulators and the digital assets industry are clashing over whether crypto platforms should be allowed to make interest-like payments to users who hold balances in stablecoins—tokens pegged to the value of a central bank-issued currency. Here’s what you need to know about the high-stakes debate.

What’s the difference between a stablecoin balance on a crypto platform and a bank deposit?

Most Canadians park their money in bank deposits without thinking much about what’s going on behind the scenes. When your paycheque hits your bank account, it technically becomes the bank’s money. It sits on its balance sheet and the bank can do whatever it wants with it, within regulatory restrictions—lend it out, trade with it or fund its business operations. The deposit is recorded as a liability—basically an IOU, a promise to give you your money back whenever you ask for it. Deposits are covered by insurance in the event the bank fails. This system drives the economy, letting banks make loans to businesses and others without needing a full reserve of funds to back them.

A non-bank, like PayPal or Neo Financial, has very different responsibilities. These companies have to keep their customers’ money completely separate from the rest of their funds, with a full reserve backing every dollar in case everyone asks for their money back at once. Usually, there’s a bank account under the hood holding those reserve funds.

Stablecoins are crypto tokens pegged to the value of a central bank-issued currency. They keep a stable value—most of the time—because they’re backed by a reserve of cash, treasuries and other liquid, relatively safe assets. When you buy stablecoins on a regulated crypto platform, that platform has to follow the rules as a non-bank and keep them in a segregated account. In turn, the issuer of the stablecoin has a responsibility to hold reserves that match every dollar’s worth of tokens.

What’s the difference between interest banks pay on deposits and yield on stablecoins?

Banks make money by using customer deposits to fund lending and other economic activity. They have the option of giving some of that money back to depositors in the form of interest to incentivize them to keep their money there. Currently, the big Canadian banks aren’t really doing this—the interest rate on most chequing accounts is close to zero.

Stablecoin issuers make money from the interest their reserve funds generate. Sometimes, they pay crypto platforms part of that interest to incentivize them to buy their stablecoins and sell them to customers. Coinbase and USDC issuer Circle have such an arrangement. Platforms can sometimes also pass a portion of that interest along to the end users on their platforms.

All the registered Canadian platforms call their interest-like payments to stablecoin holders “rewards,” saying the money comes from their corporate treasuries, not revenue-sharing agreements with stablecoin issuers or other sources. A January paper by David Krause, emeritus finance professor at Marquette University, found American crypto platforms rebranded yield on stablecoin balances as rewards after the U.S. passed legislation banning interest payments, even though the rates continued to closely track those earned by the stablecoins’ reserves.

What kind of rewards can I get on stablecoin balances in Canada?

Kraken is the only registered platform that currently offers rewards on a Canadian-dollar stablecoin. Subscribers to Kraken’s premium service can earn up to two per cent annually on QCAD—a stablecoin issued by Stablecorp and backed by Coinbase—while regular users can earn up to one per cent. In an email, Kraken Canada CEO Cynthia Del Pozo said this is “a discretionary loyalty program funded entirely from platform revenues—trading fees and similar activity—with no connection to QCAD reserve economics.” Kraken also offers Canadians a rate of 1.75 per cent on USDC. 

Meanwhile, Coinbase is the only platform with approval from the Ontario Securities Commission to offer rewards on balances of regulated stablecoins and other crypto assets. Coinbase has to disclose whether the rewards program is guaranteed or can end at any time, details of any conflicts of interest and a disclaimer that holding a stablecoin balance is riskier than putting money in a bank deposit, among other things. Coinbase offers a rate of 3.35 per cent on USDC. Laure Fouin, Coinbase’s Canadian head of legal, said in an email that the money to pay out the rewards comes from Coinbase’s marketing budget.

Montreal’s Shakepay is taking the unique approach of immediately trading USDC for an equivalent amount of U.S. dollars held in a bank account when users buy it, converting it back to USDC when they use it on the blockchain. Shakepay offers a rate of 3.5 per cent on these balances. In an email, Shakepay head of policy Carlo Campisi said the platform funds the rewards, which are “not a direct pass-through of bank interest, USDC reserve yield or lending activity.” Shakepay converts USDC to U.S. dollars because it’s simpler for customers, not because it provides protection from the legal grey area around stablecoin yield, he said.

Crypto.com offers reward rates on USDC as high as 4.2 per cent, with the rate depending on the amount, term and whether the user subscribes to a premium service. The company did not respond when asked where the money to fund the rewards comes from.

Why do crypto platforms want people to hold stablecoin balances so badly that they’re willing to pay them?

The crypto industry frames the issue as a matter of fairness. They argue crypto platforms should be able to compete with banks on a level playing field, with the same right to incentivize people to park their money with them through interest payments.

For now, most people aren’t using stablecoins as an alternative to chequing accounts, however. Stablecoins are increasingly used for mainstream payments, but their primary use continues to be facilitating crypto trading. Active traders can reduce costs and improve efficiency by keeping a stablecoin balance on crypto platforms. A platform that can attract stablecoin balances with rewards or interest is more likely to capture that user’s trading activity too.

Why are banks opposed to yield on stablecoins?

In the U.S., bankers’ associations have argued that letting crypto platforms pay yield on stablecoins is a threat to the economy and financial stability. In a January letter to the U.S. Senate, the American Bankers Association cited a Treasury Department estimate that permitting yield on stablecoins could jeopardize US$6.6 trillion in bank deposits. Less money in deposits means banks can’t lend as much, which hurts businesses and homeowners, the letter argues. An April report by the White House casts doubt on that claim, finding “a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.”

In an October post, the Bank Policy Institute argued that stablecoin issuers and crypto platforms that want to perform bank-like activities, such as paying interest, should become banks. “​​Bank-like stablecoins without full regulatory protections put the financial system at risk,” it said. 

Is yield on stablecoins allowed in Canada?

This question is more complicated than it sounds. If policymakers don’t harmonize regulations, Canada could end up with three separate regimes.

QCAD and USDC have registered with regulators as securities. That means only platforms registered as securities dealers can sell those stablecoins, subject to strict rules designed to protect investors. That makes them much harder to use for everyday payments. The benefit is that it may make it easier for platforms selling those stablecoins to pay interest to holders.

Meanwhile, the federal Stablecoin Act puts the tokens under the oversight of the Bank of Canada and proposes to ban all forms of “direct and indirect” yield on stablecoins. In an email, Department of Finance spokesperson Marie-France Faucher said the ban is intended to cover rewards tied to activity on a platform in addition to traditional interest payments. The ban is not yet in force while policymakers work on the regulations, which are expected to come into effect in 2027. 

Finally, the Stablecoin Act doesn’t apply to stablecoins issued by financial institutions. CADD, a stablecoin backed by National Bank, Wealthsimple and Shopify, is issued by Tetra Trust, an Alberta trust company. Tetra hasn’t registered CADD as a security—the company’s CEO has previously told The Logic he doesn’t think it needs to—and got approval to launch it from Alberta Treasury Board and Finance. In the spring economic update, the federal Liberals announced plans to consult with banks and other financial institutions about their development and potential use of stablecoins.