Bank of Canada States the Potential of Stablecoins

The Bank of Canada has decided to release regulations that will bind the use of stablecoins which are backed by a centralized fiat currency. According to staffers of the Canadian apex bank, regulation is crucial to understand the potential of fiat-referenced cryptocurrency assets. 

These central bank researchers released an analytic report after the Canadian Parliament failed to consider legislation. Apart from the benefits of the fiat-referenced crypto assets with regulation, the researchers note reviewed the mechanisms for creating and distributing stablecoins and a list of the potential risks. 

Just like many regions which tightened regulations around cryptocurrency following the implosion of the FTX exchange, the North American country has also fastened its grip on crypto exchanges and different trading platforms.

The central bank officials noted the high volatility of Bitcoin (BTC) and Ethereum (ETH) even before the liquidity crunch of FTX which caused several cryptos to tank further. This volatility makes it harder for these digital currencies to function as money including “a means of payment, store of value and unit of account.”

Stablecoin Attracts Several Economies

Within the space of fewer than two years, the global stablecoin market has jumped up to thirty times its previous value, specifically reaching $161 billion. Most times, these fiat-referenced crypto assets are used on crypto exchanges and oftentimes, their full potential is not utilized. Stablecoins have vital use cases, especially when combined with smart contracts.

“These crypto assets could bring efficiencies and greater competition to payment services, especially in a more digitalized economy. However, without safeguards, they could pose significant risks to the stability of the financial system,” the researchers noted.

The analytic note talked about the concentration among the identified risks as it affects the stablecoins and their holders.

“Currently the top three fiat-referenced crypto assets have 90% of the total fiat-referenced crypto asset market; […] Similarly, the top 1% of investors hold approximately 90% or more of the total supply of the major fiat-referenced crypto assets,” the authors stated.

“Instead of issuing a retail [central bank digital currency], central banks could support stablecoins by allowing them to be backed one-for-one with balances in a central bank account,” Antoine Martin, a  financial stability advisor at the Federal Reserve Bank of New York said in support of using stablecoins.