Canada proposes stablecoin rule allowing spending rewards, banning holding yield

Canada has introduced a proposed stablecoin regulation permitting issuers to offer rewards for spending transactions, while simultaneously prohibiting payments made solely for holding tokens in a wallet. This distinction is detailed within draft regulations published on October 24, with the comment period extending until December 23.

A consumer might receive a rebate when using a Canadian-regulated stablecoin to pay a merchant. Conversely, the same issuer would be barred from promising an annual return simply for users retaining that coin within an application.

The regulatory framework aims to differentiate between various incentive mechanisms, including loyalty points and distributor-funded promotions. Section 14 specifies that a payment linked to a transaction, rather than token retention, does not constitute interest or yield under the Stablecoin Act.

Issuers must evaluate both components of a promotional campaign, not just the stated label. The draft regulations require non-bank issuers to maintain reserves with Canadian financial institutions.

The Finance Department indicated that industry feedback led to permitting transaction-based rewards while upholding the statutory prohibition on yield derived from balances. The consultation period allows firms and consumer groups until December 23 to identify any terms that might inadvertently qualify as disguised balance yield.

The proposal imposes a "look-through test" for issuer-funded holding yield, meaning the regulator can examine the flow of funds rather than accepting marketing descriptions. This approach addresses the design choice between a card payment incentive and an interest-bearing cash balance presented to the same customer.

The framework also addresses indirect payments; if an issuer enters an agreement allowing another party to receive yield from holding its stablecoin, the issuer could be deemed to be paying yield indirectly.

This regulatory development signals a shift in how protocol-level incentives are governed in the Canadian digital asset space, directing competition toward payment utility rather than merely rewarding asset parking.

Why it matters

This proposal sets a critical regulatory boundary for DeFi and stablecoin utility in Canada, distinguishing between transaction incentives and yield generation. Protocol developers and issuers must closely monitor these rules to ensure their incentive structures do not inadvertently violate the prohibition on holding-based yield.