Bank Of Canada Indicates Regulatory Necessity For Stablecoins

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 stablecoins, a list of potential hazards and advantages, and an expression of the writers’ support for additional regulation of the crypto asset. It notes that while crypto assets with fiat references 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.

Between the start of 2020 and the middle of 2022, the global market for them expanded thirty-fold, reaching $161 billion.

Among the risks mentioned in the Bank of Canada note, concentration is the main subject. Stablecoin holders and the coins themselves are both subject to concentration risk. Due to their concentration, changes affecting those coins and their holders may have a disproportionately large effect on the economy as a whole.

“Another risk related to the financial system is concentration risk, in terms of both the dominance of a small number of fiat-referenced cryptoassets in the market and the small number of entities holding large concentrations of these cryptoassets. Currently the top three fiat-referenced cryptoassets have 90% of the total fiat-referenced cryptoasset market;

Tether, USD Coin and Binance USD account for 44%, 33% and 13% of the market, respectively.10 Similarly, the top 1% of investors hold approximately 90% or more of the total supply of the major fiat-referenced cryptoassets.11 The highly concentrated nature of these markets and holdings implies outsized impacts if major parties are affected by cyberattacks or a loss of confidence.”

Despite recommendations from global standards-setting organizations, most existing regulatory frameworks, in Canada and overseas, are not now fit for purpose, according to the note. Its relevance to the state of cryptocurrency regulation in Canada is arguably what makes it most intriguing.

” However, some existing regulatory frameworks in Canada and other jurisdictions are entity-based (i.e., they apply only to specific types of entities, such as banks), creating challenges…

…Work is underway, domestically and internationally, to develop a robust regulatory framework to mitigate the risks these types of cryptoassets can pose to holders, the financial system and the economy. A timely and comprehensive regulatory approach in Canada will ensure that fiat-referenced cryptoassets can deliver potential benefits without posing unnecessary risks.”

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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