Canada is consulting on rules for

stablecoins

and may announce a major update in the federal budget next week, according to people familiar with the matter.

Government officials have been having detailed discussions with regulators and industry participants for weeks, the people said, asking not to be named because the discussions are private. They have indicated they are working toward addressing the issue in budget documents that Finance Minister François-Philippe Champagne will unveil on Nov. 4, the people said.

Stablecoins are

cryptocurrencies

that are pegged to fiat currencies such as the

U.S. dollar

to maintain their value, mitigating the volatility that’s often associated with digital tokens. Today, stablecoins are typically issued by non-bank private entities such Tether Holdings SA and Circle Internet Group Inc., and they’re sometimes backed by other liquid assets such as U.S. Treasury bills.

In July, the United States passed the Genius Act, which allows financial regulators to police stablecoin issuers and how they manage reserves, and requires issuers to comply with rules to prevent money laundering and sanctions-busting. The new law was welcomed by many in the crypto industry as helping it go mainstream.

The U.S. bill characterizes compliant stablecoins as payment instruments.

In Canada, however, in the absence of legislation, regulators have said stablecoins may constitute securities or derivatives. Some experts believe they should instead be regulated as payment instruments with strict oversight.

John Ruffolo, founder of Maverix Private Equity and vice chair of the Council of Canadian Innovators, a tech lobby group, has been urging the government to act quickly. If it doesn’t, Canadian capital will flow south of the border, he said.

Without regulation to support Canadian-dollar stablecoins, savers in Canada might spurn deposits for U.S. stablecoins — which can be used to transfer money internationally. That, in turn, would hit demand for Canadian bonds, potentially pushing

interest rates

up as well as loosening the

Bank of Canada

’s grip on the money supply and ceding control of capital held in U.S. dollar-backed stablecoins to American regulators, he argued.

“Every Canadian who transacts in a U.S. stablecoin funds American debt, enriches American institutions and exports our financial data south,” Ruffolo wrote earlier this month.

Some 99 per cent of stablecoin value is currently pegged to the U.S. dollar, according to Desjardins foreign exchange strategist Mirza Shaheryar Baig, and because the Genius Act requires stablecoins to be backed mainly by U.S. T-bills, “foreign adoption creates new and sticky demand for U.S. debt.”

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Ron Morrow, the Bank of Canada’s executive director of payments, supervision and oversight, said in September that Canada should “weigh the merits of federal stablecoin regulation, similar to what other countries have done.” Canada’s bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), has voiced concern at the country’s lack of stablecoin rules.

Any discussions around federal stablecoin regulation may have to involve Canada’s 13 securities regulators — one for each province and territory — as well as OSFI. Canada’s Department of Finance declined to comment.

In his 2021 book Value(s), Prime Minister

Mark Carney

, formerly governor of the Bank of England and Bank of Canada, wrote that “the most likely future of money is a central bank stablecoin, known as a central bank digital currency,” or CBDC.

Canada’s central bank said last year it was winding down its work studying a Canadian CBDC.

Carolyn Wilkins, a former Bank of Canada senior deputy governor, recently wrote on LinkedIn: “Canada needs a legal and regulatory framework that supports our own aspirations, building trust, security, stability and competitiveness of modern Canadian dollar payments” in light of the Genius Act putting “wind in the sails of payments innovation in the U.S.”

Bloomberg.com