Ottawa will let issuers of stablecoins—crypto tokens pegged to the value of a central bank-issued currency—pay rewards to users as long as they’re tied to transactions and not passive holdings, a softening of its previously proposed ban on all forms of yield.

The great yield debate: Whether or not stablecoin issuers and crypto platforms should be allowed to offer yield on stablecoin balances has been a hot-button issue in both Canada and the U.S. The crypto industry has argued platforms should be able to pay yield on stablecoin balances just like banks can pay interest on deposits, in order to incentivize people to park their money with them. Meanwhile, banks have argued that yield could prompt people to pull their deposits out of the banking system and into stablecoins, reducing the availability of credit and threatening financial stability. The federal Liberals pledged to ban stablecoin yield paid both “directly and indirectly” as part of federal legislation introduced in November to regulate the sector.

Exception to the rule: On Friday, the Department of Finance released draft regulations detailing the rules stablecoin issuers must follow once they go into effect in late 2027. The draft regulations clarify that it’s OK to pay rewards based on transaction activity, “to encourage adoption of the stablecoin.” The U.S. has carved out a similar exception, letting crypto platforms pay stablecoin rewards as long as they’re tied to “bona fide” transaction activity. The Department of Finance said it decided to grant the exception after extensive consultations with the industry.

Eric Richmond, Coinbase’s head of Canada, said in an emailed statement that the draft regulations are an important step, but called it “disappointing” that restrictions on rewards for holding stablecoins remain. “That hurts consumers and could make Canadian-issued stablecoins less competitive,” he said. Coinbase currently has an agreement with the Ontario Securities Commission that lets it offer rewards to Canadian stablecoin holders under certain conditions. It’s unclear what will happen to such agreements once the regulations come into force.

Who’s covered: The Department of Finance said it expects the Stablecoin Act will apply to five issuers “in a baseline scenario,” including Stablecorp’s QCAD, Loon’s CADC and Circle’s USDC. Stablecoins issued by financial institutions—including CADD, the stablecoin issued by Tetra Digital Group and backed by investors including National Bank, Shopify and Wealthsimple—aren’t covered by the law. About 30 crypto companies will have to register as payment service providers with the Bank of Canada once the law takes effect, and companies that are already issuing stablecoins will have 30 days to register once it goes live.

Give me my money back: The regulations also provide new details on what issuers need to do when a stablecoin holder asks to redeem the token for dollars. Stablecoin issuers need to hand over the cash within three business days, charging a maximum of one per cent of the redeemed value in fees. The regulations also spell out the penalties for violations, including fines of up to $10 million for very serious transgressions.