Canada Consults on Stablecoin Rules While Preserving Its Ban on Yield Payments

Table of Contents

• You might want to know
• Main Topic
• Key Insights Table
• Afterwards...

You might want to know

• How would Canada’s proposed rules distinguish prohibited interest from permitted transaction-based rewards?
• What reserve and redemption requirements would non-bank stablecoin issuers have to meet?

Main Topic

Canada has opened a public consultation on draft stablecoin regulations that would establish requirements for issuers while preserving a prohibition on paying interest to holders. The consultation will run for 60 days and ends Dec. 23. The proposals come after the federal government passed the Stablecoin Act earlier this year. According to the government, the draft regulations are needed to bring the Stablecoin Act (SCA) into force and set out the requirements for issuers seeking to register with the Bank of Canada.

At the centre of the proposed framework is a distinction between interest for holding a stablecoin and rewards connected to transactions. Issuers would be prohibited from paying interest to encourage customers to retain their tokens, whether the payment comes directly from the issuer or indirectly through a third party. The rules would, however, allow rewards linked to transactions. That distinction is intended to address concerns about stablecoins functioning like interest-bearing deposit accounts while leaving room for incentives associated with using them to make payments.

The proposed restriction reflects concerns voiced by parts of the banking sector. Banks have argued that yield payments on stablecoins could encourage customers to move funds out of bank accounts and into digital tokens. If that shift were substantial, traditional financial institutions could have less money available to lend. Similar concerns have been raised in the United States. In June, Natalle Begeron, a spokesperson for the Canadian Bankers Association, told The Logic that the group “firmly supports the Stablecoin Act’s explicit prohibition on yield, both direct and indirect.”

The consultation is taking place while some Canadian crypto platforms already offer rewards to stablecoin holders. Coinbase Canada received permission from the Ontario Securities Commission (OSC) this year to offer yields on eligible tokens. That permission came with conditions: the company must warn customers about the risks and make clear that the funds are not covered by deposit insurance. The proposed federal rules would apply to stablecoin issuers and specify that interest cannot be used to encourage customers to hold their tokens. The existing example illustrates that platform-level rewards and the federal treatment of issuer payments are relevant, but not necessarily identical, policy questions.

Another major part of the draft framework concerns the backing of stablecoins. Non-bank issuers would have to maintain reserves equal to the value of their circulating fiat-pegged tokens. Those reserves would need to be held with qualified Canadian financial institutions. The eligible institutions described in the proposal include banks, credit unions, and trust companies. In practical terms, the requirement is designed to ensure that the issuer holds assets corresponding to the tokens in circulation, rather than issuing tokens without equivalent reserves.

The proposed reserve requirement is a one-to-one relationship: reserves must equal the value of an issuer’s circulating fiat-pegged tokens. The draft also specifies where those reserves must be held, limiting custody to qualified Canadian financial institutions. Together, the reserve and custody provisions would shape how non-bank issuers manage backing assets and could affect the operational arrangements they need before entering or expanding in the Canadian market.

The rules would also set a timetable and a ceiling for redemptions. Customers would have to be able to exchange stablecoins for regular currency within three business days. Redemption fees would be capped at 1%. These terms address two practical questions for holders: how quickly they can convert tokens into conventional money and how much they can be charged for doing so. The draft sets a maximum redemption period of three business days and caps redemption fees at 1%.

The consultation period gives stakeholders an opportunity to comment on these provisions before the regulations are finalized. The framework is expected to take effect toward the end of 2027. That anticipated timeline gives issuers, banks, and other regulated firms time to assess how the proposed requirements may affect their products and systems. The rules would not operate in isolation: Canadian financial institutions are also exploring digital representations of money and ways to move value through tokenized systems.

Late last month, Canada’s six largest banks said they were exploring a Canadian-dollar tokenized system intended to move money more quickly among traditional financial institutions. The announcement followed a statement on Sept. 10 from Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, that tokenized deposits are “not legally distinct from traditional deposits.” These developments point to parallel efforts: authorities are developing a regulatory framework for fiat-pegged stablecoins, while banks are examining tokenized forms of money within the existing financial system.

Private-sector stablecoin activity is also developing. Tetra Trust Company, described as Canada’s first regulated digital asset custodian, launched CADD in May. CADD is a Canadian-dollar stablecoin approved by Alberta Treasury Board and Finance. Its launch provides an example of a Canadian-dollar token already operating alongside the broader policy discussions. The consultation could help clarify how such products and future offerings are expected to meet federal requirements once the framework comes into effect.

Overall, the draft rules combine restrictions on yield with requirements intended to support reserve backing and customer access to redemption. The approach reflects an effort to define stablecoin issuance within Canada’s financial system while responding to banks’ concerns about deposit competition. It also leaves room for transaction-based rewards and arrives as both banks and regulated companies explore tokenized money. The final impact will depend on the regulations adopted after consultation and on how issuers and financial institutions adjust their practices before the expected implementation toward the end of 2027.

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Key Insights Table

Afterwards...

The consultation will help determine how Canada’s stablecoin requirements are finalized and how issuers prepare for them. In the period before the framework is expected to take effect toward the end of 2027, attention will likely focus on reserve arrangements, redemption processes, and the boundary between prohibited yield and permitted transaction rewards. At the same time, developments in tokenized deposits and Canadian-dollar stablecoins will test how different forms of digital money fit within Canada’s financial rules.