Stablecoin Lawyer

However, issuing, distributing, listing, marketing, or facilitating transactions involving stablecoins in Canada involves a complex and evolving regulatory framework.

Substance Law advises businesses on Canadian legal issues relating to stablecoins and Value-Referenced Crypto Assets (VRCAs), including securities law, derivatives regulation, anti-money laundering compliance, payments regulation, consumer protection, privacy, commercial contracting, and corporate structuring.

What Is a Stablecoin?

A stablecoin is a crypto asset that is designed to maintain a relatively stable value by referencing another asset or basket of assets.

Unlike cryptocurrencies such as Bitcoin or Ether, which may fluctuate significantly in value, stablecoins generally seek to maintain a consistent value relative to:

• a fiat currency (such as the Canadian dollar or U.S. dollar);
• commodities such as gold;
• other crypto assets;
• a basket of currencies; or
• other reference assets.

Stablecoins are commonly used for:

• cryptocurrency trading;
• international payments;
• treasury management;
• decentralized finance (DeFi);
• settlement between exchanges;
• tokenized financial services;
• payroll;
• remittances; and
• digital commerce.

A stablecoin is a crypto asset designed to maintain a relatively stable value by referencing another asset, such as a fiat currency, commodity, or basket of assets.

What Is a Value-Referenced Crypto Asset (VRCA)?

Canadian securities regulators generally use the term Value-Referenced Crypto Asset (VRCA) rather than simply “stablecoin.”

A VRCA is generally a crypto asset that is designed to maintain a stable value by reference to another value or right.

The term is broader than “stablecoin” and captures various token structures designed to reduce price volatility.

The Canadian Securities Administrators (CSA) have published guidance establishing the circumstances under which crypto trading platforms may permit clients to purchase or deposit certain VRCAs, subject to regulatory conditions.

A VRCA is the term generally used by Canadian securities regulators to describe crypto assets designed to maintain a stable value by reference to another value or right.

Why Are Stablecoins Regulated?

Although stablecoins may appear simple from a user’s perspective, regulators are concerned with several potential risks, including:

• reserve asset management;
• redemption rights;
• transparency;
• insolvency risk;
• market manipulation;
• systemic financial stability;
• consumer protection;
• anti-money laundering;
• sanctions compliance;
• operational resilience; and
• governance.

Depending on how a stablecoin is structured, it may also engage securities, derivatives, banking, payments, trust, or money services business legislation.

Stablecoins and Canadian Securities Law

Whether a stablecoin constitutes a security or derivative depends on its legal characteristics rather than its name.

Canadian regulators examine factors such as:

• redemption rights;
• reserve structure;
• issuer obligations;
• governance rights;
• expectations of profit;
• contractual rights;
• custody arrangements; and
• how the token is marketed.

A token described as a “stablecoin” is not automatically exempt from securities regulation.

Businesses should obtain legal advice before launching or offering any value-referenced token to Canadians.

CSA Guidance on VRCAs

Canadian securities regulators have issued guidance permitting registered crypto trading platforms to support certain VRCAs where specified conditions are satisfied.

Among other things, regulators expect platforms to consider:

• reserve asset quality;
• segregation of reserve assets;
• independent custody;
• redemption rights;
• public disclosure;
• independent assurance;
• governance;
• legal opinions; and
• ongoing monitoring.

The regulatory framework continues to evolve as both domestic and international standards develop.

Stablecoin Issuers

Issuing a stablecoin involves considerably more than deploying a smart contract.

Issuers should carefully evaluate:

• corporate structure;
• governing law;
• reserve management;
• banking arrangements;
• custodial agreements;
• redemption mechanics;
• disclosure documents;
• token terms;
• governance;
• sanctions screening;
• AML compliance;
• privacy compliance; and
• tax implications.

The legal framework should generally be designed before the token is issued rather than after launch.

Stablecoin Reserve Assets

Reserve-backed stablecoins depend heavily upon the assets supporting their value.

Legal considerations include:

• ownership of reserve assets;
• segregation;
• trust arrangements;
• custody;
• bankruptcy protection;
• investment restrictions;
• liquidity;
• redemption priority;
• auditing; and
• disclosure.

Investors increasingly expect transparency regarding reserve composition and independent verification.

Stablecoins and Crypto Exchanges

Canadian crypto trading platforms that support VRCAs should consider:

• CSA requirements;
• listing reviews;
• issuer due diligence;
• reserve verification;
• disclosure obligations;
• customer communications;
• risk acknowledgements;
• custody;
• cybersecurity;
• sanctions compliance; and
• AML procedures.

Adding a stablecoin to a trading platform should generally involve more than a technical integration.

Stablecoins and Payments

Many businesses are exploring stablecoins for payment applications.

Potential use cases include:

• merchant payments;
• cross-border settlement;
• payroll;
• supplier payments;
• treasury management;
• loyalty programs;
• programmable payments; and
• embedded finance.

Depending upon the business model, other legislation—including the Retail Payment Activities Act (RPAA)—may also need to be considered.

Stablecoins and FINTRAC

Some stablecoin businesses may qualify as money services businesses (MSBs) or otherwise engage Canada’s anti-money laundering regime.

Potential compliance obligations may include:

• FINTRAC registration;
• know-your-client procedures;
• suspicious transaction reporting;
• large virtual currency transaction reporting;
• sanctions screening;
• record keeping;
• compliance programs; and
• ongoing monitoring.

Businesses should determine their regulatory obligations before commencing operations.

Stablecoins and Smart Contracts

Many stablecoins rely on smart contracts.

Legal issues may include:

• upgrade authority;
• administrative controls;
• freezing functionality;
• blacklisting;
• token burning;
• governance;
• auditing;
• vulnerabilities;
• licensing; and
• liability.

Technical architecture and legal documentation should work together rather than independently.

Stablecoins and Privacy Law

Stablecoin businesses frequently collect personal information through:

• onboarding;
• KYC;
• transaction monitoring;
• customer support;
• analytics;
• wallet verification;
• sanctions screening; and
• fraud detection.

Organizations should ensure their privacy policies and internal practices comply with applicable Canadian privacy legislation.

Commercial Agreements

Stablecoin businesses commonly require legal agreements including:

• Terms of Service;
• Privacy Policies;
• token purchase agreements;
• custody agreements;
• reserve management agreements;
• banking agreements;
• API agreements;
• software development agreements;
• licensing agreements;
• NDAs; and
• commercial partnership agreements.

Well-drafted contracts can reduce uncertainty as the business grows.

Stablecoins and Tax

Stablecoin transactions may raise Canadian tax issues involving:

• income tax;
• capital gains;
• GST/HST;
• cross-border transactions;
• corporate structuring;
• reserve assets; and
• business operations.

Legal advice should often be coordinated with qualified tax professionals.

International Regulatory Developments

Stablecoin regulation continues to develop globally.

Canadian businesses frequently monitor developments involving:

• the European Union’s Markets in Crypto-Assets Regulation (MiCA);
• United States federal legislation;
• international banking guidance;
• IOSCO recommendations;
• Financial Stability Board recommendations; and
• Basel Committee guidance.

Businesses operating internationally should consider how multiple jurisdictions interact.

Why Work With a Stablecoin Lawyer?

Stablecoin projects frequently involve multiple overlapping legal regimes.

Legal counsel can assist with:

• regulatory analysis;
• token structuring;
• securities law advice;
• CSA compliance;
• exchange listings;
• commercial agreements;
• AML compliance;
• FINTRAC matters;
• RPAA considerations;
• privacy compliance;
• corporate structuring;
• legal opinions;
• regulatory investigations; and
• ongoing compliance.

Obtaining legal advice before launch is often considerably less expensive than redesigning a project after regulatory concerns arise.

Work With a Stablecoin Lawyer in Canada

Whether you are issuing a stablecoin, launching a payment platform, operating a crypto exchange, developing a Web3 application, or integrating value-referenced crypto assets into your business, Substance Law can help you understand the Canadian legal landscape.

We advise clients across Canada on stablecoins, VRCAs, digital assets, blockchain technology, crypto compliance, and financial regulatory matters.

Frequently Asked Questions About Stablecoins and VRCAs