Canada to Ban Algorithmic Stablecoins Under New Regulations

The Canadian Securities Administrators (CSA) has unveiled a new set of requirements for cryptocurrency companies operating within Canada. This regulatory body, consisting of securities authorities from all 10 provinces and 3 territories, is focusing on platforms dealing with stablecoins and other “Value Referenced Crypto Assets” (VRCAs). These assets can only be acquired or deposited on local crypto asset trading platforms with prior written consent from the CSA. To gain such approval, crypto firms must adhere to rigorous due diligence standards, which include confirming that the stablecoin is backed by cash.

In a notice released on Wednesday, the CSA emphasized that it will not approve VRCAs that rely on algorithms for value maintenance instead of being fully backed by an adequate reserve. This decision follows last May’s incident involving TerraUSD, which lost its peg to the dollar, highlighting the perils of algorithmic stablecoins.

Furthermore, the CSA mandates that trading platforms may only facilitate the trading of stablecoins that are supported by “highly liquid assets” and secured with a licensed custodian. Monthly audits conducted by independent auditors must be made publicly available without delay. The distribution of these tokens is also required to comply with Canadian securities laws, as fiat-backed crypto assets generally qualify as securities.

While recognizing the possible applications of stablecoins, including for payments and volatility management, the CSA believes these instruments carry higher risks compared to fiat currency. Concerns regarding algorithmic stablecoins are not isolated to Canada, as seen in the US where the Securities and Exchange Commission recently issued a Wells notice to Paxos, claiming that its BUSD stablecoin constitutes an unregistered security.

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