Canada to Approve Only Fiat-Backed Stablecoins as ‘Good Money’

The core of the Bank of Canada’s forthcoming policy is a specific definition of what constitutes acceptable digital currency. Governor Tiff Macklem, addressing the Montreal Chamber of Commerce, explicitly compared the desired standard for stablecoins to existing forms of “good money,” such as physical bank notes or funds held in a commercial bank account. This framing is significant; it immediately anchors the discussion of novel digital assets to the long-established principles of trust, reliability, and safety that underpin the traditional financial system. The central bank is not seeking to reinvent money but to extend its trusted characteristics into the digital realm.

To meet this “good money” standard, Macklem outlined two non-negotiable criteria. First, any approved stablecoin must maintain a strict one-to-one peg with a central bank currency, with the Canadian dollar being the implicit primary reference. This eliminates the regulatory consideration of algorithmic or crypto-collateralized stablecoins, which have been prone to destabilizing de-pegging events. Second, and crucially, the stablecoin must be fully backed by “high-quality liquid assets.” This requirement is designed to ensure that at any time, the issuer can readily convert these reserve assets into cash to meet redemption demands, thereby guaranteeing the stablecoin’s value and liquidity.

The phrase “high-quality liquid assets” is a term of art in finance, and the Bank of Canada’s guidance leaves little room for ambiguity. The central bank has specified that qualifying assets will typically include instruments like Treasury bills and government bonds. These are considered the bedrock of safety and liquidity in financial markets, characterized by minimal credit risk and deep, active markets where they can be sold quickly without significant loss of value. By mandating this type of backing, the Bank of Canada is effectively requiring stablecoin issuers to operate with a reserve model similar to a conservative, highly liquid investment fund.

This stringent backing requirement serves multiple purposes for Canada’s financial stability. It acts as a critical buffer, protecting holders from the issuer’s insolvency. If an issuer faces a wave of redemptions, the liquid assets can be sold to provide the necessary cash, preventing a collapse in the stablecoin’s value. Furthermore, it aligns the risk profile of these digital currencies with that of the traditional banking system, reducing the potential for contagion. The policy deliberately sidelines stablecoins backed by riskier commercial paper, corporate bonds, or other cryptocurrencies, viewing them as incompatible with the “good money” standard.

This regulatory stance on stablecoins is not an isolated decision but a calculated component of a broader national strategy to modernize the financial system. By setting a high bar for approval, the Bank of Canada aims to foster innovation within a clearly defined and secure corridor. The 2026 timeline for regulations provides a multi-year runway for existing projects to adapt and for new entrants to design their products in compliance from the outset. The goal is to encourage the development of digital payment tools that enhance efficiency and competition without introducing systemic risk or undermining the sovereign currency.

The implications of this policy are far-reaching. For consumers and businesses, it promises access to digital currency options that carry a government-endorsed stamp of safety and reliability. For the crypto industry within Canada, it creates a definitive regulatory path, albeit a narrow one, offering clarity after years of uncertainty. Ultimately, by insisting that stablecoins must be as trustworthy as a banknote, Governor Tiff Macklem and the Bank of Canada are seeking to harness the technological potential of digital currencies while firmly upholding their mandate to preserve the integrity and stability of the nation’s monetary system.