Senators from the United States recently sent a letter to Facebook-turned-Meta’s Mark Zuckerberg, telling him that his company “cannot be trusted to manage a payment system.” Last month, Meta announced that it was piloting its digital wallet called Novi. The pilot lets people send and receive money using a stablecoin called Paxos, whose value mirrors the US dollar’s. Eventually, however, Novi users will be able to transact in a digital currency from the Meta-backed Diem Association. Though Meta’s pilot is relatively small, the promise of using digital wallets and stablecoins for payments is revolutionary. Digital wallets circumvent the decades-old payment systems our economies run on, while stablecoins circumvent the monetary sovereignty of our central banks.
The big issue is that stablecoins are “growing incredibly fast but without appropriate regulation.” Or so says Jerome Powell, chair of the US federal reserve. From here, the risks spiral out. A run on a widely held stablecoin, backed by cash and other assets, has the potential to destabilize the financial sector just like a run on a bank does. What’s more, criminals are partial to digital currencies that provide cover for the illicit transactions they need to execute. Maybe it’s laundering money, or maybe its buying things one shouldn’t be able to buy. For regulators, money and payments aren’t things for a wild west.
As they tell Meta to stop with one hand, with the other governments are working to regulate our new era of money movement and even money itself. At the Bank for International Settlements, where central bankers discuss and cooperate to resolve issues of the day, stablecoins and how they challenge the existing order is on the agenda. Since Meta first showed its hand, the Bank for International Settlements has been preoccupied with the effects of stablecoin arrangements and how to oversee them.
As the world frets and gets ready to usher in the new era of money movement, it’s worth asking: is Canada’s public policy foundation ready for stablecoin arrangements? I think the answer is a cautious “yes.” But we may need to touch it up, filling in a crack here and there.
Canada’s foundation is mostly intact
Let’s do a thought experiment. Suppose we lived in an alternate universe. Mark Zuckerberg is a University of Waterloo dropout. Meta is Canadian, as is the Diem Association, challenging the payment systems that clear and settle most Canadian transactions: Visa’s and Mastercard’s, which support credit card payments; Interac’s, which supports debit card payments, as well as person-to-person transfers with its e-Transfer solution; and Payments Canada’s, which clear and settle a range of transactions, including wires and electronic funds transfers.
If Meta were a Canadian company, launched Novi here, and gave Canadians the option to transact with a digital currency from the Diem Association, the Canadian government could do a few things.
The Bank of Canada could try to designate Meta’s payment system under the Payments Clearing and Settlement Act (PCSA), although I doubt the Bank of Canada would succeed. Passed in 1990s, the PCSA gives the Bank of Canada the authority to designate payment systems as “prominent” or “systemically important.” These terms mean something specific: systemically important payment systems are designated as such when they have the potential to destabilize Canada’s financial system, whereas prominent payment systems are designated as such when they’re engines of commerce. To date, the Bank of Canada has only exercised this power a few times—only Payments Canada’s high value and retail batch systems, as well as Interac’s e-Transfer system, are designated.
When a payment system is designated by the Bank of Canada, the payment system needs to demonstrate that it meets several risk-management standards. Published on the Bank of Canada’s website, the standards touch on such things as financial and operational risk, access to infrastructure, the governance of the payment system, and the payment system’s effectiveness in considering the interests of its users, among other things. The standards are so vague, and the Bank of Canada’s powers under the PCSA so broad, that designated systems are at the whims of our central bank.
But the Bank of Canada can’t designate just anything that looks and feels like a prominent or systemically important payment system. It must designate a “clearing and settlement system,” and the PCSA is particular about what a clearing and settlement system is. A clearing and settlement system needs at least three participants, for example, at least one of which is Canadian. Moreover, it needs to clear and settle at least partially in Canadian dollars. I need only imagine a closed loop payment system where everything is “on-us,” or a payment system that clears and settles in cryptocurrency, to see why a PCSA designation wouldn’t work. I think Meta’s digital wallet would squeak through the cracks of the PCSA, even if the law were amended, whereas the Meta-backed Diem Association would have a harder time escaping oversight.
Alternatively, the Bank of Canada could try to capture Meta’s payment system under the Retail Payment Activities Act (RPAA). Tabled and passed in 2021, the RPAA is a new federal law that will regulate technology companies that offer payment services to Canadians.
When the RPAA is up and running, any company that gives payment accounts to Canadians or holds their money, initiates payments on their behalf, or clears and settles payments will be required to register and report to the Bank of Canada. Though the RPAA’s application to digital currencies isn’t certain, the RPAA casts a wide net. Under the RPAA, the type of activity to be regulated can be an “electronic funds transfer that is made in the currency of Canada or another country or using a unit that meets prescribed criteria.” I can’t imagine why that last bit—the unit that meets prescribed criteria—couldn’t be a digital currency.
Meta’s payment system, if regulated under the RPAA, wouldn’t be as strictly or comprehensively regulated as a prominent or systemically important payment system under the PCSA. If it’s neither prominent nor systemically important, then risk-based oversight demands that the oversight of a payment system be less demanding. Moreover, the RPAA would only make sure that Meta’s payment system did basic things to protect the funds of Canadians and manage a sliver of the risks of money movement: the risk of human error or malicious intervention when handling Canadians’ money, for example, or the risk of an external event disrupting the normal operation of the business. It’s not perfect, but it’s better than nothing.
Finally, if Meta’s payment system found a way to escape the PCSA- and RPAA-clutching hands of the Bank of Canada, the Canadian government would have one more option for oversight: the Canadian Payments Act (CP Act). Passed in the 1980s, the CP Act created Frankenstein’s Monster, otherwise known as Payments Canada, a bank-funded member association that’s supposed to run Canada’s national payment systems in the public interest—without any overt and meaningful public sector involvement. An irreconcilable tension, according to Payments Canada’s own legal counsel, but that’s another story for another time.
What the CP Act also does is give the Minister of Finance a special power: escaping the Bank of Canada just means you may have to reckon with the Minister of Finance herself. Under the CP Act, the Minister of Finance can designate a payment system if the payment system is national in scope or plays a “major role” in supporting transactions in the Canadian economy. The Minister of Finance’s power to designate is less constrained than the Bank of Canada’s is.
If the Minister of Finance were to designate Meta’s payment system under the CP Act, she could tell Meta what to do, how to operate, and how it should treat its users. Meta would need to send the Minister of Finance a copy of every rule governing its payment system. The Minister of Finance would have the power to disallow new rules from coming into force or make Meta change old ones. It’s a broad set of powers, although I don’t think the Minister of Finance has ever designated a payment system under the CP Act. Still, the power is there if Canada ever needs someone to exercise it.
Canada isn’t unprepared for a Meta-style invasion. Whether it’s the PCSA, the RPAA, or the CP Act, Canada’s public policy foundation provides some cover from a circumvention of its legacy payment systems and a challenge to its monetary sovereignty. If Meta were a Canadian company, launched Novi here, and let Canadians transact with a digital currency from the Diem Association, Canadian lawmakers wouldn’t need to send a letter to Mark Zuckerberg, asking him to put a stop to his plans. They’d just need to exercise the powers they already have, if not amend them in minor ways and hire more policymaking and enforcement capacity.
The foundation is intact, but what kind of house are we building?
Though the Canadian government isn’t unprepared for a Meta-style invasion, it’s a shame that it takes such threats to even get us thinking more seriously about our public policy foundation. It means we’re playing defence, not offence. It means we’ve been jolted into thinking about the preservation of our existence, rather than about how to support and even accelerate the innovations that will define the future of money movement. I’m not saying the Canadian government doesn’t think about the latter, but I am saying it’s hard to think about higher ideals when one’s base instincts are being activated.
We could have started thinking about a more radical future of money movement long time ago. In fact, circumventing legacy payment systems and providing alternatives to fiat currency are old news. Founded in 1989 by American cryptographer David Chaum, DigiCash was on a mission to revolutionize how we pay. Cash was king, but e-commerce was around the corner. Wary of prying, meddling intermediaries, Chaum saw the opportunity: make a digital currency whose anonymity rivals that of cash. DigiCash eventually died, but the dream that inspired it stayed alive, animating the so-called “cypherpunks” of the early 1990s, as well as the crypto enthusiasts of today.
The aspiration to revolutionize how we pay is a reaction to real problems that many governments have been too distracted to solve, including Canada’s. Research from Payments Canada and EY guessed that Canada’s payment systems are so dysfunctional for business-to-business payments that they cost Canadian businesses about $15 to $30 billion every five years. At the point-of-sale, which is more the consumer-to-business space, research from the Bank of Canada suggests that the annual cost of sending and receiving money in Canada is more than $15 billion each year. You can quibble with the methodologies of the studies, or the exact numbers they produced, but then I’d tell you that you’re missing the point.
Rather than solve these problems by supporting innovations in money movement, if not in money itself, we’re thinking of ways to put a stop to such innovations, just like those American senators—or, at the very least, the Bank of Canada’s public messaging suggests we are. The Bank of Canada is, after all, contingency planning: should it enter the market for digital currencies to crowd out the privately issued ones, such as the sort that the Meta-backed Diem Association may some day issue? “That’s the nub of the question,” the Bank of Canada’s Timothy Lane is reported to have said.
Meanwhile, the work to solve the real problems that doesn’t threaten the Canadian government is floundering. It’s hard to think of payments modernization, the multi-year program to make Canada’s payments systems fit for the 21st century, without being overcome by a sense of wanting. The real-time rail is at risk of being a glorified calculator when it launches, even though Payments Canada uncovered that it ought to be more. And that’s if we ever get a real-time rail. The new payment system was supposed to launch in 2019. Then it was delayed and pushed to 2022. I don’t think I’m breaking any news when I say it has been delayed again, with the new release date being decided by Payments Canada and its members.
Canada’s public policy foundation is mostly intact to weather the stablecoin storm, but the house we’re building on top of it is more of a fallout shelter than it is like Drake’s mansion. There’s no basketball court. There’s no pool. There’s no master bedroom the size of a house, with another small house’s worth of square footage attached to it as a terrace. There are concrete benches, as well as a lifetime’s worth of canned beans and vegetables and fruits, stacked by the pallet. Though it’s not enriching, it’ll keep us from a radioactive death. Likewise, expect Canada’s payment systems and monetary sovereignty to be safe through thick and thin. But don’t expect either to live their best life.
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