In light of the potential benefits of and risks posed by fiat-referenced cryptoassets, authorities in major jurisdictions are developing and implementing regulatory approaches. These authorities have a dual objective of promoting innovation while mitigating risks. The FSB and international standard-setting bodies have also published specific guidance, including:

A well-designed fiat-referenced cryptoasset that adequately manages risks should have a reserve of high-quality liquid assets denominated in the reference currency and separated from the issuer’s own funds (Financial Stability Board 2022). Furthermore, holders of these assets should have the legal right to redeem them at any time, subject to any clearly disclosed redemption restrictions.12

The FSB’s central recommendation to follow the principle of “same activity, same risk, same regulation” is behind the development of national regulatory approaches. In practice, this implies that issuers of fiat-referenced cryptoassets should be regulated prudentially and meet capital and liquidity requirements, given they are as exposed to run risk as commercial banks are (Financial Stability Board 2022). Some jurisdictions are applying or considering these prudential requirements for issuers through their current banking or payments regimes, while others are developing new custom-made regulatory regimes. Most jurisdictions are regulating or proposing to regulate cryptoasset exchanges and trading platforms under securities regimes and wallet providers under e-money or retail payment regimes. These regimes will deliver the same level of protection to cryptoasset consumers and investors as they do to consumers and investors in the traditional financial system.

National authorities are at different stages of developing and implementing their regulatory approaches. This work is necessary because most existing regulatory regimes, in Canada and abroad, are not presently fit for purpose. They were not designed for the unique features of fiat-referenced cryptoassets and the networks of entities and activities involved in their creation, distribution and use. For instance, the cross-border and online nature of these assets and associated activities can create legal uncertainty about how to apply some existing regimes and make enforcement action challenging. Using DLT can further complicate enforcement by making it hard to identify individuals to hold accountable for certain activities. Given these unique features, activity-based regulatory regimes (i.e., ones where regulations apply to the activity, no matter the type of entity performing it) are better suited. 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.

At the time of writing, Japan and the European Union are finalizing their regulatory frameworks, which are expected to come into force in 2023 and 2024, respectively (Amaya 2022; Council of the European Union 2022). Meanwhile, Singapore’s framework is already in place (Monetary Authority of Singapore 2022). The United Kingdom, the United States and Hong Kong have also proposed regulatory frameworks (HM Treasury 2021; US Department of the Treasury 2021; Hong Kong Monetary Authority 2022).

In Canada, the Canadian Securities Administrators (CSA) has published a framework to regulate and oversee cryptoasset trading platforms (CSA 2020). Also, such cryptoassets are considered virtual currencies under Canada’s anti–money laundering and anti-terrorist financing regime (Proceeds of Crime [Money Laundering] and Terrorist Financing Act). Businesses that deal in virtual currencies—such as for providing exchange or value transfer services—are considered money services businesses under this regime and are subject to compliance and reporting requirements. Earlier this year in its Budget 2022, the federal government announced a financial sector legislative review focused on the digitalization of money (Department of Finance Canada 2022). In the first phase, the focus will be on digital currencies including cryptoassets. More recently, in line with guidance from the Basel Committee on Banking Supervision, the Office of the Superintendent of Financial Institutions (OSFI) has announced an interim approach to the exposure of banks and insurers to cryptoassets (OSFI 2022a). The interim approach determines the regulatory requirements that banks and insurers must meet for holding cryptoassets. It categorizes cryptoassets into two groups and outlines the respective capital and liquidity treatment of each group as well as limits. OSFI has also proposed a Digital Innovation Roadmap, which outlines its workplan including developing prudential regulation for fiat-referenced cryptoasset arrangements (OSFI 2022b).