Paiements sur la chaîne de blocs : comment les cryptomonnaies stables, les dépôts convertis en jeton et les instruments de paiement numériques peuvent transformer le marché des services de paiement au Canada

Peter Aziz (00:02:20)

Hello, everyone. Welcome to our, our webinar. We're going to be talking about stablecoins, tokenized deposits, CBDCs and essentially how they all work together and what are the implications for the overall Canadian payment system.

We are really thrilled and honored to have with us today Peter Mackenzie of the C.D. Howe Institute.

Very quickly, I'll introduce myself and then ask my colleagues to introduce themselves. So I'm Peter Aziz, I'm Senior Counsel here at Torys. I'm coming up on 35 years of practice here. I'm in the FI Regulatory group. I co-chair our Payments and Cards group. I deal with AML and economic sanctions. I also deal with consumer protection, mainly for financial products.

And I'll pass the mic to Peter to introduce himself.

Peter MacKenzie (00:51:29)

Thank you. My name is Peter MacKenzie, and I work at the C.D. Howe Institute as a Senior Policy Analyst, where I lead the Financial Services Research Initiative. I recently graduated from York University with a PhD in Economics.

Mohammed Muraj (01:04:17)

And my name is Mohammed, I’m Counsel here at Torys, I lead our Digital Assets group. In my spare time, I launched something around blockchain a few years ago, when I was part of the team at Polymath, the Polymath Protocol out of Switzerland. So, good familiarity with, with the technology and its use cases and obviously a pleasure to help our clients and, kind of navigate through the applications and hear Dr., Dr. MacKenzie, great article and, really pleasure to kind of discuss this with you.

Peter MacKenzie (01:30:19)

Yeah. Thanks so much. And thanks for having me on today. I'm excited to discuss stablecoins and everything that comes up.

Mohammed Muraj (01:38:17)

Yeah, let’s do it.

Peter Aziz (01:38:07)

Wonderful. So very quickly for our agenda, so we're going to talk, of course, about the different types of stablecoins, which are generally issued by non, non-financial institutions; tokenized deposits, which are issued by, essentially, financial institutions; and central bank digital currencies, which, if it does come to come to fruition, would be issued by the, the Bank of Canada.

So we're going to talk about those generally, we're going to talk about use cases and emerging payment infrastructure. But what I'm really excited about is when we get to regulatory and infrastructure considerations, we’re just going to have a general discussion here.

So, we're going to get into things like, well, what are the risks and issues that arising from the use of, of these items? When someone purchases a—one of these, where is the money actually going? Is it going to a financial institution, or is it going somewhere else? What are the implications of that? When these—call them stablecoins—when they settle, what does, what does that actually mean? What does “settlement” mean? And will these things always be worth a dollar? And what's going to happen in the times of financial crisis?

And so, Peter, you’ve written a really tremendous paper. It's clear that you and your colleagues have spent a lot of time thinking about these issues. And so, really happy to have you here and, and get the benefit of your expertise.

So, leading off with very generally, essentially, what are stablecoins and how do they compare to, to one another?

Mohammed Muraj (03:12:05)

When we're talking about these types of payment instruments that exist on distributed ledger, there's three. And the reason we want to just talk about this upfront right now is so that our audience and ourselves, we have a kind of common understanding as we start using these terms, what they mean. And so, there's stablecoins, there's tokenized deposits, and then there's central bank digital currency.

And what, in my opinion, like, the two major differentiating factors between each of them is who the issuer is and what's maintained as a, kind of like a reserve asset for each one. So, the stablecoin being the most easiest to conceptualize, is a, is a, you know, payment instrument on the distributed ledger, which is issued by a private issuer and is fully reserved with a reserve of assets.

So, for instance, if you're going to issue 1 million stablecoins or $1 million worth of stablecoins, then you must have $1 million in a reserve. So, when someone seeks to redeem their stablecoin, they can get that $1 back. So there has to be an at least one-to-one reserve here. Whereas a tokenized deposit, the issuer will be like a regulated financial institution, because what it tokenized deposit represents, really, is a claim against the issuer's balance sheet, like, so it's—whereas, like, if I deposit something in a bank, you know, then the bank has an obligation to kind of redeem that deposit on demand. And so that's a liability on the bank's balance sheet. And unlike a stablecoin, it is not reserved one-to-one. There is a reserve requirement like liquidity, et cetera, but it's not one-to-one, it's, it's fractional because banks obviously participate in, like, the credit creation and they would lend out the funds that they would receive.

And then last but not least is the central bank digital currency, which, in this case the issuer would be the government, so in our case it would be the Bank of Canada. And it would be a legal tender. And it would not be reserved, like, on a one-to-one or any basis. It would, it's, it's, it's, it's underlying, like, confidence comes from the confidence in the Canadian government to, to meet its liabilities.

So, Peter Mackenzie, like, is this kind of at a high level, kind of, cover off?

Peter MacKenzie (05:14:16)

Yeah, I think that's a perfect description really of each one of these categories of, sort of these tokenized or stablecoins, CBDCs. The one thing I would say for stablecoins, there's also the algorithmic stablecoins, which instead of keeping their peg to whatever the reserve currency is, instead of keeping that peg through keeping assets, they mint and burn coins on, like, an algorithmic basis.

Our paper does not deal with algorithmic stablecoins at all. There's the sort of now-famous Terra Luna collapse in 2022. And they don't really seem to be able to be used because of their possibility for collapses or to not maintain that peg. They can't be reused, used reliably, as a payment instrument.

Mohammed Muraj (05:59:02)

Exactly, exactly. And, and we see, like, more and more, like, when a stablecoin is being discussed, especially in more like formal channels in regulations and those—what is being considered here are fiat-backed stablecoins, not the algorithmic or other, like, asset-backed, right, stablecoins, because their value tends to fluctuate with the underlying assets and, or in the algorithmic one just based on the algorithms, the way it works, it, it manages the demand and supply.

So, thank you for that clarification. That's very important. And, but, so for the balance of this presentation, when we mention stablecoins, what we are referring to are, like, fiat-backed stablecoins.

Peter MacKenzie (06:32:17)

Exactly. Yeah.

Peter Aziz (06:34:34)

Thank you. So, so I'm going to turn now to use cases because people will ask, well, why do we need these things? What's the purpose? We already have Interac. We have a way of making e-transfers which are quick and efficient and can happen, essentially, 24/7.

So what do you think are the use cases or the potential, potential of these?

Peter MacKenzie (06:59:03)

Yeah. And that's sort of the number one question I would get when talking to people about this paper before I published it, would be like, well, what's the point? Like, what advantages do these stablecoins give us that, like, our traditional banking system or traditional payment rails don't already have? Because, you know, for every day uses like, if I wanted to send $10 to Mohammed or $10 to Peter, I would just use Interac e-transfer: I send it, you get it within minutes. It seems like it's almost instant. But really behind the scenes there, there's a delay on the bank’s end and if I send it to you on the weekend, for instance, the payment wouldn't actually clear until Monday. So it creates a sort of, almost, deadweight loss in the payment rails. Whereas if you have instant transactions, it actually is instant, and there's no, there's no, sort of, time, waiting time, there, on the bank’s end even if it's doing it over the weekend.

And then, beyond that 24/7 settlement, there's also cross-border payments. So, if you were to make a traditional cross-border payment using your financial institution like a bank, you know, you could incur up to, like, $25, $30 in fees. It really, up until recently, cross-border payments of, like, small amounts were hardly even possible because of these fees. With stablecoins, it's cheaper and easier. You know, it can cost cents to make, only cents on a dollar to make a cross-border payment. So really, it's allowing this for the first time, these, like, smaller cross-border payments.

And when I was writing this paper, I'd never actually used a stablecoin before. And I felt like a bit of a fraud writing about it. But I used an exchange platform, acquired a stablecoin and got my friend in San Diego to do the same, and we sort of sent money back and forth just to test it out. And it really is just instant and safe and, you know, it worked perfectly.

And then finally also, programmability. So, since I'm assuming lots of our audience are probably lawyers, if you're doing a M&A deal, for instance, there's usually an escrow agent involved in the process. With stablecoins, you could theoretically have it programmed, the actual coin programmed, to only release funds when, like, certain conditions are met. So you could really replace, like, escrow agents, and then, like, similarly, if you're, like, an independent contractor or something of the sort, a freelancer, and you're getting paid in stablecoins, you could have the coin programmed to put a certain amount towards taxes, a certain amount towards expenses, than a certain amount towards personal income.

And that could all be instant, like, as soon as a payment. And these are sort of things that would traditionally involve other actors or other players in that process.

Peter Aziz (09:28:08)

Interesting. Because when you mentioned, for instance, an escrow agent, it illustrates the extent to which current legislation around safeguarding of assets, around payment, needs to change. So, for instance, law society rules governing lawyers are very strict around how funds must be held in a lawyer's trust account and, and centralized to a certain—Certain service providers that are proposing alternative means for payment of funds upon a closing, they've come up against a lot of resistance from the law societies. And then this is, kind of, you know, two or three steps further. So, yeah, definitely, require some, some interesting changes. And so, looking at, use cases, did you want to talk about the comparison among the three types?

Mohammed Muraj (10:15:15)

For sure. I think just kind of building off what, like, Dr. MacKenzie just kind of mentioned right now, when we're talking about, like, 24/7 availability, programmability, et cetera, this is talking about, like, what the technology enables. So, this would be true for tokenized deposits as much as it could be for central bank digital currencies as it could be for stablecoins.

So that's a distributed ledger layer. But with respect to the instruments themselves, because you have different issuers and you have the different, like, the reserve characteristics of them, they enable, like, a different use. So, we're not necessarily living in a world where it's either/or—it's not necessarily, like, oh, is it going to be stablecoins or tokenized deposits, or because we have central bank digital currencies now, we don't need stablecoins. Because they have different issuers, they are—they have different reserve requirements, they fulfill a slightly different purpose, all on that same technology layer, which allows for programmability, 24/7 settlement, et cetera.

So, the slide on the screen basically kind of goes over what, you know, what the paper actually mentions as well about the different use cases of these. And one of those that Dr. MacKenzie also mentioned for stablecoins, for instance, they're much more open. Anyone can issue them, whereas, like a tokenized deposit, it could only be issued by an institution that accepts deposits. So that would be like a, like a bank.

So because the stablecoin is being, it could be issued by any issuer, like, it's privately issued, it has to be more open, provided obviously the reserve requirement is met. And this allows for what, you know, I think in your paper you mentioned, like, underbanked constituencies. So maybe you can kind of build on that.

Peter MacKenzie (11:47:17)

Yeah, for sure. So, in Canada we have very high rates of people having bank accounts, but there is a small segment of the population that is—either doesn't have a bank account or has, like, is underbanked. So, they don't, they're not operating with, like, full financial capabilities, or they could be. And there is the argument that stablecoins or even possibly CBDC could sort of bring—help bring these people into the financial system and give them access to digital financial tools. And yeah, I think that's an important use case.

And, I also think the question of, like, sort of either/or for the three, I think stablecoins, since it—anyone can create them through the Stablecoin Act, they have to be properly regulated but anyone theoretically can create them and, you know, they're open, peer-to-peer settlement, and they likely will have, like, more technological developments quicker than maybe tokenized deposits, just because maybe larger financial institutions are a little bit more risk averse, maybe move a little bit slower.

But then on the other end, tokenized deposits, really, from a user standpoint, it wouldn't be that much different than what's currently in your bank account right now. It would look the exact same. It would just be the technology layer that's different. And theoretically, the tokenized deposits could still allow for programmability. And, you know, maybe cheaper cross-border payments. But it's likely that stablecoins might be able to develop some of that, stablecoin issuers might be able to develop some of that a little bit quicker than the traditional financial institutions.

And then, finally, CBDCs also play an important role. One, like you said, for sort of bringing people in that maybe are underbanked. But again, I think it also comes down to the singleness of money. So, the Bank of Canada plays a very important role in maintaining singleness of money between reconciliation from interbank transfers and making sure that, you know, each bank's dollar is equal to one Canadian dollar just through interbank settlement.

But I think it is important just as cash today, you can go to your bank and get a physical representation of central bank money. I think as cash use decreases, CBDCs could sort of replace that role and give people a direct claim on the central bank for the retail user. Or, it could be a wholesale CBDC, which you could look at, at retail CBDC, which is my preference, but I think also wholesale CBDC, that only, you know, large financial institutions and maybe stablecoin issuers have access to that can do clearing settlements, provide liquidity lines, that should be able to do it in a more efficient way than the current payment rails.

Mohammed Muraj (14:20:05)

So currently, like, the Bank of Canada has, like, the Lynx payment system, which is used by, like, you know, like, the heavy duty, you know—big, big transfers. So, is that what the wholesale CBDC is really kind of meant to address?

Peter MacKenzie (14:31:12)

Yeah. Yeah, exactly. Exactly that. And it should just make for maybe a little bit more efficient system that way.

And around the singleness of money, there's an example, and it's from a long time ago, but if you look to the open banking area in the United States during the late 1860s, they didn't have a national currency. And we had a similar environment in Canada, actually, around the time as well. But they didn't have a national currency, and each bank sort of issued their own currency that then would trade at differing rates between banks.

And not that I think this is going to happen in Canada, but you could sort of see a similar system where, you know, you have stablecoin issuers issuing one sort of currency and, you know, maybe my bank and your bank issue a currency, all the Canadian dollar, but if your bank's offering you one interest rate and my bank's offering me another, and the stablecoin issuer is offering another, you know, we want to make sure that each one of these digital Canadian dollars is actually redeemable one-to-one on par for a Canadian dollar. And we don't end up in this sort of situation where we have different currencies.

Mohammed Muraj (15:32:00)

Yeah. So just, I'm just going to kind of, like, double-click and circle back a little bit here between the three instruments.

So, for instance we mentioned about underbanked constituencies. So, where you have, like, for instance, let's compare stablecoins with tokenized deposits. A tokenized deposit doesn't necessarily alleviate that concern because you still need a bank account with a bank in order to be able to do that. So if you don't have the papers or whatever you need in order to be able to get that banking service, you won't get it. But a stablecoin, on the other hand, doesn't require a bank account, and so therefore it makes it much more accessible.

And I think in one of your responses—like, you just mentioned in one of your responses, like, the cross-border payments, I think this is a huge, like, massive-type incremental change. And the reason is, is, for instance, like, if I were to make a, an international transfer, there are fees associated with it, anywhere between like $20 to $50, et cetera, in order to get the wire across and all these other things, which limits the type of things I would buy using that. So, for instance, if I'm going to buy something for $30, but then I have to pay $20 in fees, it doesn't make any sense. But if I can eliminate or minimize those fees, it all of a sudden opens up a whole new way to conduct business, a whole new economic activity which before wasn't economically feasible. Right? Because it just didn't make any sense.

And so stablecoins being more open, being more inclusive, you know, one would think that they would be better. And they are used for cross-border payments, et cetera, with lower costs. You, like, open up this whole new economic activity that otherwise our traditional rails or our tokenized deposit, which is more, kind of, on a domestic system, would not be able to alleviate.

So this kind of answers the question as in, like, you know, somebody might ask, like, well, why would I hold a tokenized deposit if I could hold a fully reserved stablecoin or vice versa? Well, it depends on what would you want to do with it? And then of course, like what, what it entails. And we're going to kind of get a little bit more into it, like, tokenized deposits may have, like, certain other features like interest, or some insurance like CDIC, they may—you know, CDIC insurance, et cetera, so they become a safer instrument, whereas a stablecoin doesn't have CDIC and doesn't or shouldn't yield interest.

So, there's all these considerations that kind of go in. And of course, the central bank digital currency is, like, a layer that, as you mentioned, the singleness of money. And we're going to talk about that a little bit more as well. So, I think, I think that, kind of, you know, I just want to, kind of, talk about the different use cases, different instruments, how they work together and what, kind of, you know, what, what each, like, pain point they can address.

Peter MacKenzie (17:52:14)

Yeah. Yeah, I think that's a great overview of the three.

Peter Aziz (17:55:05)

Sure. So just a couple quick comments in terms of, of underbanked—of course, people in different countries who are underbanked—of course, if they have a, a cell phone, they can fairly easily get wallets or wallet accounts from fintechs. And, and they can use that to transact, which is not to say that this isn’t important, but what they do have that ability now.

Interesting in terms of using for cross-border or just currency, so just yesterday I was talking to a client, for AML purposes, looking at, essentially, following the flow of funds. This was a Canadian investor in a fund based in Canada, where the investment funds were US dollars. As it turns out, a Canadian investor, which has a, you know, Canadian dollar bank account because both banks need to use a correspondent bank in the US, the money actually—there's flowing to the US, across the US, and the question is, well, is it, is that actually held in Canada? Like, where is the, in the funds account held? And it turns out, well, funds are actually at the correspondent bank in the US, but they're on the books of a Canadian bank in Canada. So it's, it just goes to show you how difficult it is using current rails, which, which this can solve.

And the one thing I'll just spend one minute just talking about settlement and what settlement actually means. So, fiat currency, when a payment eventually settles in an account, there's a, you know, a dollar amount shown as an amount that's—it goes from sender's account to recipient's account. When a stablecoin transfers, clears, and settles, what one has in one account is the stablecoin, rather than the fiat currency.

So, so what is that? We've been thinking about what that means, what that is, when we're working for clients and it seems to be a—other than CBDCs, it's a promise of the issuer to pay the amount. And we can think of it as an instrument, either a note, a non-deposit note, or a note that, that gets passed around, and it gets passed around on the blockchain.

It’s almost like, “Hey, I have this instrument and I want to pay you.” I pay it to you, and you have that. So, so you have the claim. So, so it's not fiat currency. It's a, it's a promise to pay by the issuer to receive fiat currency. But then if we go back to the regular bank account, what you have, it's honestly, if you've got, say, $100, that's, you know, a stack of bills, it's something sitting in a vault with your name on it.

If—that's the promise of the bank at which you maintain the account to pay, promise to pay you, essentially, you have the right to, to demand, and it's, that's a demand deposit account. What's interesting is a CBDC, central bank digital currency, if you have that in your account, well, then it is like having a stack of bills set aside as, as you're saying, Peter, because that is a, a promise of the central bank to pay you rather than, rather than some issuer.

Mohammed, we're talking about issuers. There's a lot more to the ecosystem than just issuers. Could you, could you tell us a bit about that?

Mohammed Muraj (21:07:29)

Yeah. So, I think generally, like, when clients first come into this space, they have—they approach it from a very binary perspective, like, are we going to issue, like, a stablecoin or tokenized deposit or are we not? Right? And, and usually it's, like, okay, like, we can work through that analysis. But there's also other components within it, that, you know, because as we kind of mentioned, there's a new technology layer, how you can participate within the—if not within the issuance of itself, like, be the issuer, but within the redemption management, custody, et cetera.

And so, this slide tries to, kind of, hit at those points here: that whether, you know, an FI or a fintech is not really in the business of issuing stablecoins. That's okay. But, you know, let's say its customers may be holding these stablecoins. And so, do you want to provide some sort of platform for you to, you know, custody it on their behalf, or they can hold it with you on your platform?

And of course, there's administration and reserve management, all these other services as well. So, I think, this is what that slide is supposed to kind of hit at, here, is that there's different levels where an entrant could come in and where they would kind of provide the services.

Peter MacKenzie (22:14:10)

Yeah. Yeah, exactly. And I think another sort of distinguisher, like, yes, there's the, the issuer, sort of like a circle or tether for a USDC, USDT. And then most people are actually accessing these stablecoins through a crypto exchange platform or exchange platform. And, you know, those are like Coinbase or Shakepay or Kraken. And that's sort of where the majority of retail users are accessing and using stablecoins.

But that could change. And there's also the option to use a private wallet where you have your, sort of, own, your own key that only you would know and can access it that way. But that sort of difference, difference between the issuer and the exchange platform is also important.

Peter Aziz (22:53:01)

Thanks. And just in, in response to a question we have, how are stablecoins of any type held? What kind of account would they be held in?

Mohammed Muraj (23:03:07)

Stablecoin currently is, like, held on your—you could, you could leave it on the platform, or you could withdraw it and keep it in your wallet, whether that's online or in, in a hardware security module, like a ledger wallet. But currently they're, you know, like, let's say if I wanted to hold it with my Schedule One bank in Canada, right? There's like, they don't, it's not like they'll, they're going to hold it for me. So I could either keep it myself. But there's a risk involved because, you know, let's say if I'm moving and, and my wallet gets thrown out in the trash, I lose all the stablecoins that are on it and other digital assets, so, you know, a safer way, sometimes, is to hold it with a third-party custodian like a BitGo, et cetera, that would manage it for me.

But then at that point, you know, like, I'm subject to their control because they hold the keys to my wallet. And, you know, let's say if the government says, you know, “Freeze Mohammed's wallet,” they can do that. So currently there are third-party, like, custodian solutions. But they can be held, personally, in my own wallet as well. Like, self-custody.

Peter MacKenzie (24:03:27)

Yes. And there's some famous examples of people losing their, their key.

Mohammed Muraj (24:07:24)

Well, it's not—

Peter MacKenzie (24:08:19)

Losing out on millions of dollars.

Mohammed Muraj (24:09:22)

It's not famous and it's not millions of dollars. But, you know, we did a reno and I lost my wallet, and, and, you know, like, again, it's not nearly close to a million or anything. I personally know founders, like, in, in the blockchain space who have wallets and have forgotten the passwords, but, like, they have a seed phrase: instead of writing what it was, they used, like, a trick, you know, just in case if someone else found it. Except they forgot the trick, and they actually had millions on their wallet, and they haven't been able to, like, access it, you know.

And so that's obviously a risk, you know, that, then it would kind of make sense to have a third-party custodian. Yeah, yeah.

Peter Aziz (24:47:06)

Interesting. So, we're going to turn now to regulatory considerations and how Dr. MacKenzie is, has been, addressing some of these considerations. And the first one is about the need for a Canadian solution. So just picking up some interesting quotes from your paper. One is “The country faces two fundamental risks: erosion of monetary sovereignty if US-dollar linked stablecoins become the preferred means of payment, and loss of control over domestic payment rails.” Would you be able to elaborate on what the concern is here?

Peter MacKenzie (25:23:09)

Yeah, for sure. When I first started writing the paper, my, my main concern was actually the first one: erosion of monetary sovereignty. And I sort of envisioned—maybe not likely, but possible scenario where, you know, you have these USD-backed stablecoins operating in Canada. Canadians can use them, maybe they're cheaper or, you know, theoretically, they should be cheaper at the point of sale for the merchant.

And, you know, they're offering interest payments to holders, and maybe Canadians, you know, through network effects, start switching to these USD-backed stablecoins. They're holding those more so than they're holding Canadian dollars. And then the Bank of Canada is, monetary policy decisions, like around interest rates, maybe don't have the same effect on the overall economy anymore because of this currency switch.

But I think because Canadians, you know, are paid in Canadian dollars and they’re taxed in Canadian dollars that there’s sort of going to be a natural ceiling to how much demand there is for USD-backed stablecoins, even if they do offer certain benefits. So then that sort of brought me more towards the second risk: the loss of control over domestic payment rails.

And I think even if they're Canadian-backed stablecoins or CAD-backed stablecoins and they're operating in Canada, if it's US companies that are costing the custodians or the wallets, if it's, if we're using stablecoins through those exchange platforms and it's, you know, US companies that are running the ledgers and US companies that are actually even making the Canadian-backed stablecoins, we could enter a situation where, you know, US regulatory rules are sort of above Canadian rules and we don't have regulatory control over our payment systems.

And I think with, right now, with the current US administration, I don't think we want to leave that up to chance or, you know, we don't want, we don't want to have that risk of leaving, you know, maybe Canadians’ funds under the control of the United States. And then we have, you know, some kind of financial crisis. There's a run on stablecoins. I could totally see a world where, where the current US administration sort of ring-fences those assets and pays out Americans first, and then, you know, Canadians are left without being able to redeem.

And even, like, minor substitution from Canadian dollar to US stablecoins, it could cause, sort of, irregularities in the Canadian markets, Canadian bond markets even, you know, if people are redeeming in mass amounts around tax season to pay their taxes, if they're redeeming all these stablecoins and they're sort of, like, predictable every tax season, there's going to be this big redemption. Well, one, it can cause monetary policy transmission to not work as well. And it can cause, sort of, market irregularities depending on the time of the year.

Mohammed Muraj (27:51:13)

Yeah. But also, like, in addition, like, not quite monetary sovereignty, but also, like, every time, for instance, I purchase a USDC, I am using Canadian dollars to purchase US dollars, which I then, like, reserve in a US bank account by Circle, who is the issuer. And, you know, I guess then there is a switch from, like, there's a leakage of the Canadian currency from Canada to US and, you know, leaving less liquidity in our system is, I think, like—your paper may have touched on it, but is this also a concern?

Peter MacKenzie (28:24:10)

Yeah, absolutely. And it's, yeah, less lucrative. Like, I think fundamentally too, we don't, we don't want to use another country's currency in—for domestic at least, en masse for domestic purchases. It's, like, just part of, part of monetary sovereignty or even sovereignty of a nation in general. I think, currency can play a role in that.

And having a Canadian dollar is important for that.

Mohammed Muraj (28:46:15)

Yeah. For sure. And so, I think that's, that's very important. And so, you know, not only the Canadian government but other governments have kind of have responded to this. And you're seeing, like, a stablecoin framework coming into, into focus, which is kind of worldwide. Right?

We can see, like—you know, in the EU you had the MiCA, which is markets and crypto assets regulations. They were released a couple of years ago. Which provisioned for stablecoins and, you know, payment tokens and what they call, like, asset tokens.

Then you have, of course, in the US, you have the GENIUS Act, and the UK is taking a, a “wait and see” approach. The FCA, they have some draft legislation.

And then of course, Canada, you know, a few months ago released a Stablecoin Act, which your paper kind of touches upon. So, if it's okay, I'll do a quick, like, overview of the Stablecoin Act, and then we can kind of really dive more deeper into the regulatory considerations.

The Stablecoin Act is a, is a draft legislation in Canada. And similar to, you know, its counterparts in, the Europe and US and, and out east, like in Singapore, et cetera. You know, it requires a registration requirement, it has protective measures in order to ensure, like, holders of the stablecoins are protected with, like, a reserve of assets, that those reserve assets are protected from creditor claims, and then they have policies, et cetera, so there's more transparency, et cetera, to the holder.

But interestingly, the Stablecoin Act also has exclusions. And this is where, like, our original side where we talk about the different instruments kind of come in and having a knowledge about them.

So, a Stablecoin Act does not apply to financial institutions. Although, like, that doesn't mean financial instruments can’t engage in the issuance of it. They could engage in it the same way, like, they engage in other activities which the Bank Act doesn't, like, on the face of it, like, permit, like, two wholly owned subsidiaries, et cetera. But I think here, like, where we're—and you know, they don't apply to central banks because if a central bank issued a stablecoin, it would be a central bank digital currency.

And they don't apply to closed-loop ecosystems because again, they're not really, like, part of our monetary system. Like, these are, like, reward programs and kind of closed-loop ecosystems.

And now when we read the limitations with background of the different instruments, we can start seeing why it's been drafted in this way.

So stablecoin and, you know, should not be issuing any interest or yield because technically, like, a tokenized deposit might do that or, you know, like, your debt instrument, which is under securities laws. It's not legal tender. So, it's not like a central bank digital currency. It's not a proof of deposit, tokenized deposit. And it's not insured under a public insurance system like a CDIC. So again, it's not a tokenized deposit.

So you can kind of see that the drafters of the Stablecoin Act, as their peers in other countries, have kind of turned their attention to this, have turned their attention to the different types of instruments, and kind of really created a perimeter as to, like, what these instruments will regulate and what kind of fall outside of it.

Now, before we go on to the next slide, or we can go on to the next slide. It's in the news recently, Dr. MacKenzie, as we were discussing before, that it's up for debate again whether stablecoins should yield interest. And I know our draft legislation says they shouldn't and so does the US GENIUS Act. But I understand, like, this week, you know, there's discussions in the US amongst the different groups whether they should.

And so, what's your view on that?

Peter MacKenzie (31:56:01)

Yeah, that was an important part of the paper that Mark and I, um—our view is that the issuer should be able to offer at least some interest to holders of the stablecoin. When you look at banks, who traditionally offer interest on deposits, you know, they operate in a fractional, fractional reserve banking. So, you know, they take your money and then they make investments, private credit, equities, whatever it is.

And, and then they offer you some interest on that. Stablecoins, as long as they're regulated properly, they would take your money and only invest in, like, short, short-term government bonds and debt. And you know, that is inherently a more safe asset to have—be invested in. It's hard for me to understand or to rationalize why, like, a bank would be allowed to pass interest along on their investment but a stablecoin issuer, if they want to, isn't allowed to pass interest along. And I think although you're right, the GENIUS Act and the Stablecoin Act both, like, don't allow for interest payments to holders, I think no matter sort of what the regulatory environment is, they're going to find a way to pass along something to holders.

You know, Mark, my co-author, sort of used the proverbial toaster example of opening a bank account and you got a toaster, or—

Mohammed Muraj (33:02:16)

Or, like, the more recent example, you get, like, a smartwatch or, you know, like an iPad.

Peter MacKenzie (33:06:26)

Yeah. No. Exactly. And so I don't see a way that they can actually really stop some interest getting passed along to holders, whether it's through, you know, something like that, some kind of rewards program or if it's, most people are, like I said, are using stablecoins through exchange platforms like Coinbase or Kraken or Shakepay. Those platforms are currently—at least Coinbase I know is offering, at one point it was over 4% yield, for holding USEC.

And, like, I don't see how you can stop that in a regulatory environment. So, like, my opinion is, like, why create all these other hurdles that they're sort of have to do workarounds to pass along that interest? We might as well just allow direct interest payments to holders. And there is risks around that. Like, you don't want to disintermediate, and bank deposit. Like, you want banks to create credit, you want banks to make investments. It's one of the most important parts of the economy. In the paper, we suggest maybe having, like, either maximum amounts that you can keep in stablecoins if you're receiving interest or, like, durations so that these stablecoins, like, are used primarily for payment purposes.

Mohammed Muraj (34:09:12)

Right. I think, like, one of the, like, major, like, friction points here is that, like, whereas a financial institution like a bank engages in credit creation, which is very important for our economy and the multiplier effect, a stablecoin issuer necessarily is, you know, is actually not taking in the reserve asset and then lending it out. Otherwise it's no longer a stablecoin. It needs to have a one-to-one reserve. Right? And so, like, that credit creation would be, would be missed. And if there's a huge dislocation of assets from, like, tokenized deposits or in a normal, you know, bank, bank account to a stablecoin because it's the issuing interest. And so I think that's, like, you know, one of the issues that obviously our policymakers—we need to turn to, as you mention as well.

Peter MacKenzie (34:49:14)

Yeah. No, definitely.

Peter Aziz (34:50:17)

Peter, so what—one of the statements in terms of a regulatory framework and what type of laws are you going to govern, what type of coin? You suggested Canada should establish two distinct regulatory tracks for tokenized payment instruments. Pure payments stablecoins would form a dedicated track under Bank of Canada oversight. All tokenized bank deposits would remain within the existing prudential banking frameworks.

So, we've talked about the Stablecoin Act. Could you elaborate on what you're thinking about the existing banking framework?

Peter MacKenzie (35:23:19)

Yeah. So for our two track system, the tokenized deposit part, they would operate essentially under the same—or exactly under the same regulations and rules as current banks do as financial institutions.

So under OSFI regulation and from a user standpoint, it really wouldn't be any different than today. You know, if you use your online banking, everything would look the same. Everything would act the same primarily from the user standpoint. It would be more so on the banks’ end that you'd see the improvements, with speed and finality of the payments and the, you sort of cut out some of this deadweight loss around the payment rails and even what you were saying, Peter, earlier, going back and forth, like, you could cut out some intermediaries in a lot of the payment space that are, won't be necessary if you have tokenized deposits.

But yes, those would operate pretty much wholly within the current banking regulatory structure.

Mohammed Muraj (36:14:02)

And then we have, like, a distinct, like, stablecoin structure as well, which again, will have, like, the one-to-one reserve requirement and may, maybe or maybe not [inaudible] the interest, direct and indirect and, like, who the issuers are, et cetera.

Peter MacKenzie (36:26:28)

So for the track one of the pure payments stablecoins, I think it will be really important to make sure that these are really used as payment instruments, like, sort of to fight against that disintermediation of bank deposits, like, we do want people just to be using them as payment instruments, not as, like, a money market fund, essentially.

Although I think tokenized money market funds are coming as well, too. And then, you know, that gets into a whole ‘nother discussion of, like, why can't, why can't I use to make a payment? But, but then they won’t, like, a tokenized money market fund wouldn't necessarily have exactly one-to-one reserve requirements like a stablecoin.

So—

Mohammed Muraj (37:02:13)

Exactly. And I think what's interesting is, like, when we, let's say, when we're talking about, like, the stablecoin regulatory framework in your paper, you mentioned, like, a kind of very unique, I think, recommendation, which is, like, these Bank of Canada liquidity lines. Right? Yeah. Can you like expand on that? And what's it, meant to address.

Peter MacKenzie (37:19:14)

Yeah. So Mark and I, we thought that it was important that, the Bank Canada extend their liquidity facilities also to stablecoin issuers to, to fully regulated approve stablecoin issuers. So right now, Bank Canada liquidity facilities are extended to, major financial institutions like the big six banks. And I think for public confidence in stablecoins, it will be important to have these liquidity facilities as well.

Yeah. And if you have a situation where there is a run for, say, on, on a simple an issuer huge redemptions surge, you don't necessarily want them to have to then like hurriedly sell all their short term government debt in or bonds into, into the market right nown the United States, in 2024, stablecoin issuers were the third-largest purchasers of T-bills in the United States.

And if there is a run, like, the Bank of International Settlements, it's actually modelled, like, how different stablecoin runs and redemption surges could actually cause pretty major volatility in the bond market. And you don't really want that. And, so for public confidence, I think it'll be important to have the liquidity facilities and so that you don't get that sort of major bond market volatility that you could see if they just have to sell all their assets. Ideally they could just sort of pledge them, the Bank of Canada could give them the money to repay to the holders of the stablecoin. And you can make sure there's always a one-to-one peg.

Mohammed Muraj (38:40:22)

So when, so when we're talking about, like, a Bank of Canada liquidity facility, it—let me just kind of, like, maybe summarize and then, kind of ask the further on question here, it's, let's say where you have, you have a disorderly environment and there are redemption requests. It's basically two. Because the stablecoin issuer has pledged these high-quality assets like T-bills, et cetera, you don't want them to sell into a distressed market and get pennies on the dollar, further reinforcing this loss of peg. So the Bank of Canada would kind of step in there and take these assets and provide a liquidity until the markets settle, and then it could cash it in and recover its position?

Peter MacKenzie (39:15:04)

Yeah. Yeah, exactly. That would be the idea. And I think because of that, like, backup, like, the public will hopefully have more confidence in using them and trusting sort of the infrastructure around them.

Mohammed Muraj (39:26:19)

So then let's apply it to, like, a real world, you know, example. So, you had like, a few years ago, Silicon Valley Bank, right? It had an insolvency and Circle was holding a lot of its assets at Silicon Valley Bank. And in that process, you know, people lost faith in Circle because they said, “Oh, these assets, you know, may not be available.” And it lost its peg.

I, if I remember correctly, they actually went down to, like, you know, the low 0.9. So like almost 10% or more. And so in that situation if, let's say Bank of Canada line—liquidity line existed for, you know, a Canadian issuer, how would that function?

Peter MacKenzie (40:01:04)

So, that's a good example. And my understanding is SVB, the Silicon Valley Bank, sort of did a similar thing to what I'm talking about, where they pledged their, they held more long-term government debt, and they sort of pledged that to be able to repay depositors. But yeah. So the, the liquidity facilities would be extended if it was a Canadian issuer, they would be extended and they would be able to—the public could have confidence that every single coin they owned would be, uh, redeemable one-to-one with a Canadian dollar.

Mohammed Muraj (40:24:10)

So, but it's not a guarantee. It's a liquidity line. Yeah. It’s not like the Bank of Canada is standing behind it.

Peter MacKenzie (40:29:06)

No, no, the Bank of Canada is not directly guaranteeing the asset, but they are, you know, as long as, long as it is properly functioning and as long as they actually are holding, you know, one-to-one or even more if they're over-collateralized, they're holding more government debt than what the, the stablecoins in issuance are, than it should be, it should work.

Mohammed Muraj (40:50:16)

And so, Peter Aziz, just a quick question, like, if these equity lines existed, would that mean, like, the issuers of stablecoins would need to have an account with the Bank of Canada? I guess it would, right? It’s a linked system?

Peter Aziz (41:02:05)

Right. Right. Certainly the Bank of Canada is not going to be willing to step in if the assets are not essentially with it or, or it has some way of having access to those.

So, it's interesting, your comment on, on T-bills. So, let's just circle back to essentially the, the Canadian banking system. So, so let's start with, essentially, a digital wallet without stablecoins and then, well, there’s bank account, digital wallet, and then stablecoins.

So bank account, obviously, money's on deposit with a bank. Subject to Basel III capital requirements, a bank can use that—deposit that money to lend out. A wallet, that is offered—a fiat wallet, that's offered by a non-FI, well, right now under the Retail Payments Activities Act, they would be an offer—someone that offers that, well, there's two ways that offer it. Either it would be just a co-branded bank account with the name of the fintech PSB on it, which is no, no different than an existing bank account. But there are other types of wallets, which—wallet accounts whereby, essentially, if a customer is putting money in that wallet under the RPAA, the offer of that wallet has to place those funds essentially on deposit with a deposit taking institute.

So even though someone is not transacting directly with the bank, every dollar is essentially placed in to eventually find its way into a deposit account. So, essentially, overall amount of money on deposit with banks is not limited.

But when we get to stablecoins that are not issued by a, by a deposit-taking institution, then there's the concept of, well, they need to—the money have to be, has to be placed security, securely. But it doesn't need to be held, unlike the digital wallets. It doesn't need to be held with an FI. It can be held, as is indicated, but with the purchase of short-term government instrument.

So, you have an interesting chart table in your paper about the US and the rise of, essentially, the amount of short-term government instruments that are being, that are being purchased. And do you have any thoughts on how that could affect, essentially, a government or a country’s monetary policy?

Peter MacKenzie (43:27:00)

Yeah, so stablecoin issuers like combined USDC, USDT, the—in 2024 were the third-largest purchasers of T-bills in the United States. And I think that can have pretty drastic effects, actually. And, you know, as its people use them more and more, that was in 2024, it's just going to keep increasing. And at some point, they may even likely become the largest purchaser of US T-bills.

It could sort of have effects on both ends. I think because you have this, like, influx of people purchasing T-bills, it sort of has, it will have, interesting effects, especially as you see people may be purchasing less US government debt, possibly. That seems to be the trend, the de-dollarization trend. It could sort of counteract a little bit of that.

But at the same time, you know, maybe tokenization and stablecoins in general could provide other countries with the ability to more easily move away from the US dollar. I think it can have effects on both ends. But I think extending the liquidity facilities is important in Canada so that we sort of, we don't have, like, extreme bond market volatility any time there's large redemptions in stablecoins.

Peter Aziz (44:30:22)

Also in the idea of supporting the value of a stablecoin, especially in a time of crisis, there's an interesting quote from your paper: “A central bank digital currency could serve as the foundation for Canada's future digital monetary system, including stablecoins and tokenized deposits.”

So this is a very interesting aspect of the paper, because people generally consider central bank digital currencies to be effectively dead. But you're recognizing there is a possible opportunity here, especially given that the US has essentially killed off their version. So, could you elaborate on that?

Peter MacKenzie (45:06:28)

Yeah, so I think there's a lot of opportunity here for a central bank digital currency. I'm in favour personally of a retail central bank digital currency in addition to a wholesale. You're right, the US has no plans of launching that, through the Bank of Canada actually researched for, for years, central bank digital currencies and got relatively far along the process of, you know, developing one.

They've since taken a step back. They recently held a public consultation. It got pretty negative reviews, this, on the central bank digital currency. People have concerns about privacy and government control of the money, currency. But I think, one, it's, I think it could be a politically charged issue. And it's likely the public consultation got people that are mostly majority negative on it. Like—you know, I didn't answer the public consultation, I don't think many people would unless they were against the central bank digital currency. But I think it can serve, on the wholesale and I think it can improve efficiencies for interbank transfers and liquidity lines.

And then on the retail end, I think if we do have the system with different stablecoin issuers and different tokenized deposits from different financial institutions, I think having a neutral settlement layer—so, you know, if, Peter is holding one stablecoin and I'm holding another and maybe we're both using different exchange platforms, there's sort of that interoperability, both at the platform level and actually at the stablecoin level itself, the issuer level. And I think having a neutral settlement layer, central bank digital currency or even a layer that people—you know, I can sell my stablecoin and it can be a, it can go into a CBDC, and then I can buy another or I can trade it for another stablecoin, or I can put it into a bank, and I could do, you know, I can move between two stablecoins without even involving a financial institution, which I think can also be an important part of this.

But right now, across stablecoin, if, you know, if I'm switching one stablecoin for another, there's different ledger technologies that do that privately. But I think having a public Canadian option can be important. And I think there's, there's history, there's some history of ledger fraud and there's different, things.

So having a secure Bank of Canada CBDC layer could help with that.

Mohammed Muraj (47:13:24)

You know, now that we’ve moved more into a networked environment, and we’re talking about central bank digital currencies and network money, you know, like, if you lose, you know, your internet connection all of a sudden, you know, where, how do I get my hands on my CBDCs, or, or my computer or my CBDCs?

But the point I was making is the fact where we're going to get a proliferation of additional, these types of, like, distributed ledger technology payment instruments, they're—having a centralized digital currency allows for more efficient settlement of it. Right? And so instead of, like, so, for instance, like, if I want to redeem my stablecoin, instead of having to go to a program manager that then needs to contact its bank, then that needs to make, you know, a transfer to my bank account, if it could all be done using CBDCs and it could all just be redeemed in that way, it would be way more efficient and it could be much more automated, as well, and again, using, and allow more use of that technology and the benefits that it enables.

But I think also another point that you, we talked about very early in this presentation is the singleness of money. Right? And if you have the central bank digital currency, then all of a sudden you have the ability of the Bank of Canada to step in, to kind of give some assurance through the liquidity lines, et cetera, and to oversight that stablecoin, let's say, issued by one issuer versus another issuer, should still be worth one dollar at the end of the day.

And so when we use the example of, like, the, you know, the, Circle losing its peg because of the Silicon Valley situation, you know, now, let's say if I'm holding a Circle coin versus a Tether coin, you know, I've lost the singleness of money, even though they're both stablecoins and they're both dollars, like, oh, this is worth 90 cents and this is worth a dollar or 99.9 cents.

And so, you know, it just ends up being—so having that central bank digital currency kind of enables that. But I think there's more to it because I think you mentioned retail and wholesale. So, can you maybe double click on that a little bit and kind of just, you know, where the difference is? And by the way, we have a, I favour the, the wholesale [laughter] but we can discuss that.

Peter MacKenzie (49:07:18)

And in our paper we sort of recommended, like, at a minimum wholesale. So, I do think and I've sort of covered it, like, there's definitely advantages to having the wholesale CBDC. Although the Lynx system, it works well, I think there's efficiency advantages to having the wholesale CBDC. And I think it can make providing liquidity lines faster and easier and, sort of, the interbank transfers 24/7.

Not that this is a wholesale CBDC. But, like, in the United States they have the Fedwire now, which I think it's, like, 22 hours a day or something like that. I think using a wholesale CBDC has definite advantages.

Now, from the retail side, it is more controversial. But, yes, I think for the singleness of money, I think having the ability to, to actually have, like, a physical in terms of cash but now digital claim directly against the bank, or against the central bank, is important.

And in times of stress, like, the demand for cash in Canada usually increases quite a bit. So even though people aren’t using cash really at the point of sale, that sort of continued to go down over the years, we see, like, in 2020 during Covid, there's a huge increase in the demand for cash.

Yeah. And the Bank of Canada sort of had these, these interesting graphs where it was like cash use at the point of sale was just continually going down, and then cash use to cash demanded is just continuously going up and, I think it's sort of more—less so now that we're not in such a crisis time.

But it seems to me at least that people like to be able to, in times of crisis, switch to maybe having more of their money in a direct claim on the central bank rather than a traditional financial institution. So I think a retail CBDC plays a role there.

And then, like we were talking about, with sort of the interoperability between platforms, stablecoins, and even the ledger technology, CBDC could, could play an important role there as well.

I think overall, the—even the ability to, like, exit the traditional financial market and take your cash and only have the claim on the central bank digital currency, like, I know that's hardly ever exercised by anyone, but I think having that option, I don't know, it can play an important part in the financial system.

Mohammed Muraj (51:11:18)

Yeah. And I think we'd be kind of remiss if we didn't mention the fact that, you know, we talk about 24/7 settlement, et cetera, like, the Lynx settlement system is, it's, it's, it's instantaneous. And of course, we're working on a RTR, like, real-time rails, which I think is like 70 seconds, right, from initiation to payout, et cetera. So pretty real time.

But you know, any pushback on that? Like, why do we need this? We already have real-time rails.

Peter MacKenzie (51:33:19)

Well, I'll say—

Mohammed Muraj (51:34:22)

Well, we'll be having real-time rails.

Peter MacKenzie (51:35:24)

Yeah. The real-time rail reminds me a little bit of the Eglinton Crosstown [laughter]. But I think it is coming and I think it will come this year. And, and, like, I'm looking forward to that. I think that'll be a great, a great addition to the financial system and, sort of, payment space.

Real-time rail is still operating, like, through the traditional financial institutions. And, it's not going to have the programmability aspect of stablecoins. And—

Mohammed Muraj (52:00:05)

And we could have redundancy as well.

Peter MacKenzie (52:01:03)

Well. Yeah. No. Exactly. Yeah.

Mohammed Muraj (52:02:24)

Yeah, exactly.

Peter MacKenzie (52:04:02)

And yeah, having—and, like, the CBDC should also be able to offer, offer a different technological layer. So, you know, in 2022, there was that Rogers outage—and this example, hits close to home because I wasn't able to attend The Weeknd concert, because the Rogers Centre, all their payment systems didn't work because of this outage.

And, you know, when there was an outage in Toronto, you had to use cash to pay for stuff. And it's like if we move to all digital forms of payment and, you know, then we have an outage of the traditional banking rails and the stablecoin rails, I think there's value in having this sort of backup retail CBDC that one could use and, like, you know, if there's outages in these two other areas, people are still able to transact, people are still able to, to use—yeah, they're still able to do transactions.

Peter Aziz (52:56:05)

One, on the last point on the inter- or intra-convertibility, again, we need to get the Bank of, the Bank of Canada comfortable on that, because if anyone can just exchange all of the tokens they’re holding for CBDC, then, effectively, that would amount to a, a Government of Canada, essentially, guarantee on those.

And, of course, the Government of Canada, they, they don't even guarantee fully or stand behind fiat assets at commercial banks. It's CDIC insurance up to, up to $100K.

Mohammed Muraj (53:33:02)

But I don't think it would be a direct settlement. Like—so it's not like if I'm holding like, say QCAD, I would get like a, I would be entitled to a CBDC. It was the, it would be the Bank of Canada acting through its, like, program partners of QCAD, let's say, to kind of fund them in order for them to be able to make the redemptions all on the same platform.

But you're right. Like, no guarantee. Yeah, yeah.

Peter MacKenzie (53:50:24)

And, and although bank accounts, like you said, CDIC covers up to $200,000 or $100,000. And, and if the stablecoins, ideally, if you have a payment-oriented stablecoin, like, you're not going to be holding $200,000 of that. So that can also help, maybe, with the Bank of Canada being more comfortable with that.

Peter Aziz (54:08:22)

Certainly. Okay. So, we're now at time. So, I just wanted to thank our audience for attending. In particular, thank my, my colleagues, Dr. MacKenzie and Mohammed Muraj. We're really grateful and honored to have you here. And wonderful discussion. Thank you. Thank you very much. Thank you.

Peter MacKenzie (54:28:20)

Thanks for having me.