Canada proposes stablecoin rules banning yield and capping redemption fees at 1%

Canada's government has proposed rules that would bar stablecoin issuers from paying interest to holders and cap redemption fees at 1%. The Department of Finance published draft Stablecoin Regulations in Part I of the Canada Gazette on Oct. 24 and opened a 60-day comment period. The regulations are needed to bring into force the Stablecoin Act, which received royal assent in March.

Once the act and regulations take effect, issuers that are not financial institutions such as banks, trust companies or insurers would have to register with the Bank of Canada before issuing a stablecoin. The department expected about five issuers to be covered, citing QCAD from Stablecorp, CADC from Loon Technology and Circle's USDC as examples.

Stablecoins in Canada are currently overseen only through provincial and territorial securities regulators' supervision of crypto trading platforms. Under Canadian Securities Administrators (CSA) rules, platforms may list only stablecoins that meet those requirements, but there has been no framework governing the issuance of stablecoins used across provinces and internationally. The department cited risks including inadequate reserves, issuer insolvency and the exposure of personal information.

Redemption within three business days, fees no higher than 1%

The draft requires issuers to redeem stablecoins one-to-one in the reference currency. Redemptions must be completed within three business days of a request, with no minimum amount, and fees may not exceed 1% of the redeemed amount. Issuers must post a notice on their website at least seven days before starting to charge or raising redemption fees.

The department said direct redemption fees in the current market run around 0.1%, but a cap at that level could be overly restrictive for emerging or smaller issuers. A cap materially above 1%, on the other hand, could discourage the use of stablecoins, it said.

No interest for holding, rewards for using are allowed

Issuers may not pay interest or yield tied to holding a stablecoin. The draft also bars indirect payments through arrangements with any parties, including parties that are not stablecoin holders. Income-sharing deals in which the issuer funds another party's interest payments are the main example. Rewards tied to using a stablecoin, such as for payments or transfers, are not treated as interest.

The department said the ban is meant to distinguish stablecoins from interest-bearing products that compete directly with bank deposits. Fintech companies and financial institutions viewed yield on holdings as an important aspect of the framework, and the department held industry roundtables in January and June as well as bilateral meetings. It said it then settled on allowing transaction-based rewards while keeping the ban on yield for held balances. Issuers also may not present a stablecoin as legal tender or a deposit, or as covered by deposit insurance or a government guarantee.

Reserves limited to cash and government debt maturing within three months

Issuers must hold reserves at least equal to outstanding stablecoins at the end of each day. Eligible assets are demand deposits (including cash), government debt securities with a remaining maturity of three months or less, reverse repurchase agreements with a one-business-day term, and money market funds made up entirely of those assets. Reserves must be held at a Canadian-incorporated qualified custodian. The draft sets no limits on how reserves are split among eligible assets.

Issuers must publish a monthly report on outstanding stablecoins and reserve composition and submit it to the Bank of Canada. Complaints must be acknowledged within seven days and resolved within 30 days. Penalties would reach up to C$1 million for a serious violation and up to C$10 million for a very serious violation. Two or more serious violations would be combined into a single very serious violation.

Companies that hold stablecoins for customers or process payments, such as wallet providers, would also come under supervision. The draft amends the Retail Payment Activities Act regulations to prescribe stablecoins as a payment instrument. The department estimated about 30 additional businesses would fall under Bank of Canada oversight as a result. They would need operational risk management frameworks and frameworks to safeguard customer funds and would have to report incidents.

Fall 2027 target; existing issuers get 30 days to apply

Companies already issuing stablecoins could keep issuing until their application is decided, as long as they apply within 30 days after the act takes effect. Those that fail to apply, or whose registration is refused, would have to stop issuing. The finance minister would have 60 days to decide whether to review an application on national security grounds. In its explanatory notes, the department pointed to the U.S. GENIUS Act, the European Union's Markets in Crypto-Assets (MiCA) framework, and regimes in Japan, Singapore, Hong Kong and the United Kingdom. The Governor of the Bank of Canada may exempt an issuer from some requirements where a provincial or foreign framework is "substantially similar." Industry asked for more clarity on that mutual recognition, and the department said the Bank of Canada would provide it through guidelines.

USDC, one of the stablecoins named in the draft, also trades in the Korean won markets of South Korean exchanges. On Upbit, USDC traded at 1,335 won and Tether (USDT) at 1,332 won at 3:33 p.m. KST on Oct. 27, 0.5% to 0.7% above the won-dollar exchange rate of 1,325 won at the same time.