On February 22, the Canadian Securities Administrators (CSA) released updated legislation for crypto asset trading platforms. Companies that want to legally operate in Canada need to comply with more stringent regulations.
New standards may strongly impact platforms dealing with stablecoins. Now, the CSA’s written consent is required for a crypto trading platform to get permission for purchases and deposits in "Value Referenced Crypto Assets" (VRCAs), including stablecoins.
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The CSA explicitly stated in its notice that:
“For greater certainty, we would not expect to provide consent in respect of a VRCA that is not fully backed by an appropriate reserve but rather maintains its value through an algorithm.”
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This statement effectively bars algorithmic stablecoins from being listed on trading platforms, as these types of stablecoins use assets based on smart contracts as their pegs instead of traditional asset reserves like fiat currency, securities, precious metals, or cash equivalents. The value of such cryptocurrencies is regulated through coin minting and burning in response to fluctuations in price compared to their peg.
Indeed, some algorithmic stablecoins fail to maintain their stability. One of the most notable cases was that of terraUSD (UST) in May 2022. Despite its strong position as the third-largest stablecoin by market capitalization, terraUSD failed to maintain its peg of $1 falling to $0.35 between May 7 and May 9. Meanwhile, the native token of Terra’s blockchain, Luna, which was supposed to stabilize the price of terraUSD, crashed to just a few cents from $80.
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To protect customers from losing their investments, the CSA allows trading platforms to deal with the stablecoins backed by reserves maintained by a qualified custodian. The reserves should include solely “highly liquid assets.”
Securities administrators also require monthly audits for stablecoins and expect compliance with Canadian securities legislation.
