A note by Central bank researchers says regulation is the key to reaping the benefits of fiat-referenced crypto assets, stablecoin.
On December 19, Bank of Canada employees published an analytical note on fiat-referenced crypto assets, also known as stablecoins. The note included an overview of the processes for producing and dispersing stablecoin, a list of potential hazards and advantages, and an expression of the writers’ support for additional regulation of the crypto asset.
Between the start of 2020 and the middle of 2022, the global market for crypto assets with fiat references expanded thirty-fold, reaching $161 billion in U.S. dollars.
The note states that while they are mostly employed on cryptocurrency trading platforms, they offer the potential for a wide range of other purposes, particularly when used in conjunction with smart contracts.
“These cryptoassets could bring efficiencies and greater competition to payment services, especially in a more digitalized economy. However, without safeguards, they could pose significant risks to the stability of the financial system,” the authors wrote.
The note focuses on concentration among the risks identified. Concentration risk applies to stablecoins themselves as well as holders of stablecoin:
“Currently the top three fiat-referenced cryptoassets have 90% of the total fiat-referenced cryptoasset market; […] Similarly, the top 1% of investors hold approximately 90% or more of the total supply of the major fiat-referenced cryptoassets.”
Due to their concentration, changes affecting those coins and their holders may have a disproportionately large effect on the economy as a whole. Despite guidance from international standards-setting bodies regarding the regulation of fiat-referenced cryptoassets, “most existing regulatory regimes, in Canada and abroad, are not presently fit for purpose,” the note stated It briefly outlined frameworks and interim measures currently being developed and concluded:
“A timely and comprehensive regulatory approach in Canada will ensure that fiat-referenced cryptoassets can deliver potential benefits without posing unnecessary risks.”
The note’s relevance to the state of cryptocurrency regulation in Canada is arguably what makes it most intriguing. The “Encouraging the Growth of the Cryptoasset Sector Act” (Bill C-249) was presented to the House of Commons of Canada in February.
Although the crypto community in Canada overwhelmingly supported the measure, it proved to be politically controversial and was virtually killed off after its second reading