Stablecoins in Canada: essential regulations to avoid overflows

A threatened financial system? – The Bank of Canada plead for a increased regulation of the stablecoinsreferring in particular to the risks they would pose to the stability of the financial system.

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Stablecoins in Canada: the need for a safeguard

A note of December 19, published by staff members of the Bank of Canada leans on the stablecoins. The document analyzes the issuance and distribution mechanisms, as well as the risks and the benefits potential, of these.

The authors of the note also express their support for a regulations further of the sector. And to defend this position, they specify the evolution of these cryptocurrencies anchored with a fiat currency, emphasizing that their market world has been multiplied by 30 from early 2020 to mid-2022, reaching the 161 billion US dollars.

The global stablecoin market grew 30-fold from early 2020 to mid-2022, reaching US$161 billion.
Evolution of the market capitalization of stablecoins – Source: Bank of Canada

Although he acknowledges that stablecoins can “bringing efficiency gains” and increase competition in payment services, the document underlines that in “lack of safeguards”stablecoins bring risks major on the financial system stability.

Stablecoins: a market dominated by three giants

The note refers in particular to the concentration riskindicating that three fiat-referenced cryptocurrencies hold (USDT, USDC and BUSD), alone, 90% of the share of this market and that 1% of investors owns around 90% or more of the total supply of these cryptocurrencies.

Given these figures, the turbulence that would affect these three stablecoins would have significant repercussions on the whole economy. The authors of the note then insist on the need for regulations that can make it possible to take advantage of the advantages of these stablecoins, without having to expose themselves unnecessarily to certain risks.

Nevertheless, the development of such regulationswhich would therefore be vital, could constitute a big construction site for legislators and regulators. Indeed, the note refers to the absence of regulatory regimes in Canada or abroad that are truly adapted to stablecoins.

While working on the premises of a possible state digital currencythe Bank of Canada therefore opens or pushes a little further the reflection on the regulation of stablecoins. The note can also be interpreted as an acknowledgment of a significant growing adoption these cryptocurrencies anchored to a fiat on behalf of the institution.

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