Canada plans to allow rewards related to the consumption of stablecoins, but not to allow profits to be obtained merely from holding stablecoins.

A stablecoin regulation proposed by Canada will allow issuers to offer rewards for payment activities, but prohibits paying “token holders” earnings. This distinction appears in the draft regulations published on October 24, with a public comment period lasting until December 23.

• Article 14 allows rewards to be linked to stablecoin transactions, but excludes payments linked to token holdings.
• The proposal considers the income distribution arrangement between the issuer and third parties as indirect income, as long as such arrangement encourages the distribution of rewards to token holders.
• The issuer is required to redeem any amount within three working days, with a maximum redemption fee of 1% of the redemption value.
• Reserve funds must cover the circulating tokens at the end of each day and must be held in qualified financial institutions within Canada.
• The 60-day consultation period will end on December 23, 2026, after which the proposed framework will come into effect.

If customers use stablecoins regulated by Canada to make payments to merchants, they may receive cashbacks. At the same time, the same issuer cannot promise an annualized return simply because users keep these coins within the application. Between these clear scenarios, there are also points systems, platform promotions, as well as arrangements where distributors pay customers and the issuer provides funds to the distributors. The draft attempts to distinguish who is making the payments and what behaviors are eligible for rewards.

The text in Canada's Gazette is currently still just a proposal. Article 14 states that payments that are linked to transactions but not to holdings do not constitute interest or earnings as defined by the Stablecoin Act. The following paragraph further extends this to arrangements between issuers and others: if such arrangements enable the other party to obtain earnings from holding, or encourage them to pay earnings to token holders, they will also be considered within the scope of the regulations. Companies designing payment programs must assess both aspects of the activity, and cannot rely solely on the labels used in promotional materials.

The importance of the release date lies in the fact that the framework is still in the consultation phase. Issuers cannot consider the communiqué dated October 24th as a business license, nor can it be regarded as final approval for any loyalty program product. The Stablecoin Act lays down fundamental prohibitions, while the draft regulations explain how the government intends to enforce them. Businesses and consumer groups can point out by December 23rd which provisions may inadvertently cover payment rebates or leave room for them to be disguised as balance earnings. The final regulations may differ from the current text.

For customers, the starting point for judging a discount is to look at the payment trigger conditions. Does the reward get credited upon completion of a merchant transaction, or does it increase because they hold more tokens in their wallet for a longer period? Can users withdraw their balance immediately after making a purchase while still retaining the reward? The answers to these questions are more indicative of the actual benefits than the percentages advertised. Issuers may promote the rewards obtained through consumption as having high annualized equivalent yields, but the advertising format cannot change the actual payment conditions.

The draft sets the boundary at "for which type of behavior payment is required".

Canadian officials had previously heard opposition from fintech companies and banks to a complete ban on rewards. The Ministry of Finance stated that it had taken into account industry feedback and ultimately decided to allow transaction-based rewards, while maintaining the legal ban on balance earnings. The use of incentives, merchant rebates, and loyalty programs, which were initially mentioned in the consultation document, are precisely the arrangements that the Canadian Web3 Commission hopes to explicitly permit.

Article 14(1) is quite brief: Payments or rewards that are linked to the trading of stablecoins but not to the holding of stablecoins are not considered interest or earnings. Providing a fixed rebate for completed purchases is more in line with this definition than paying a certain percentage monthly based on the average balance of the wallet. The actual terms of the project are what matter. If customers must hold 1,000 tokens for 30 days in order to receive the so-called “consumption bonus,” then this reward may involve both holding and consumption.

The draft does not provide a complete, approved list of card promotions; instead, it sets boundaries for businesses. One platform may return a small portion of each completed purchase to customers, while another might offer a monthly bonus based on the lowest balance of that month. Even though both are referred to as “cashbacks,” their economic realities are different. The latter still has to comply with the ban on coin holding earnings.

This law focuses on issuers, and Article 14(2) blocks the route of bypassing through intermediaries. If an issuer reaches an agreement with another party that allows that party to earn profits from holding its stablecoin, including through revenue sharing, the issuer may be considered to have indirectly made those payments. The same section also covers another arrangement: where the issuer encourages others to pay profits to token holders through an agreement. If an application merely distributes money on behalf of the issuer and that application itself receives financial support for doing so, then the issuer cannot exempt itself from responsibility by claiming that 'it was not I who made the direct payment.'

For independently funded promotional activities, there indeed are issues regarding boundaries. Merchants may offer discounts to customers who pay using a certain token without the arrangement of the issuer; platforms may also use their own revenue to distribute rewards. The indirect income provisions in the draft are aimed at arrangements involving the issuer and do not automatically consider all third-party payments as payments from the issuer. The text does not assert that any specific existing projects are necessarily compliant, and companies still need to review the contracts behind these discounts.

Let's take a look at how the issuer and merchants share the rebates. Merchants can directly reduce prices during checkout, while the issuer can cover the costs of attracting new paying users for the merchants. If customers receive the same discount regardless of their wallet balance, then the promotion seems to be linked to transactions. However, the contract terms are still important: if an additional payment increases with the customer's average holding of coins, that would touch on another issue under clause 14(2). Regulators can trace the flow of funds and will not accept mere marketing claims.

Loyalty programs that are priced in points also encounter similar practical issues. Each purchase that earns points does not automatically constitute interest, as customers can later exchange those points for goods. If points are credited daily based on the balance of stablecoins, the economic foundation is different, even if the issuer never uses the term "interest." Exchanging points for tokens, cash, or discounts can affect the value of the rewards, but the most fundamental difference in this draft lies in: why the rewards are given in the first place. Service providers need to keep records to prove the completed payments and how each reward is calculated.

These proposals also leave behind issues of ordinary competition. Stablecoin issuers with larger volumes of payments may be able to fund transaction rebates using their processing revenues, whereas smaller competitors cannot. Banning token holding rewards will not align these budgets; instead, it will direct competition towards the use of payments, rather than relying on the idea that money can earn interest simply by being held. Therefore, this consultation affects not only crypto exchanges but also card networks, fintech wallets, and merchants.

How projects go over the line

Assume that a certain payment app offers a rebate of 1 cent for every 1 dollar spent by merchants. If customers only receive the reward upon completion of the payment, and holding more tokens does not change the amount of the reward, then this project would appear to meet the criteria for transactional payments described in clause 14(1). This example is merely intended to illustrate the meaning of the provisions and does not imply that Canada has approved any specific project by name.

What if one condition is changed? Suppose the application pays 4% annual interest on the tokens held in the wallet and requires a monthly snapshot of the balance. In this case, the amount will increase with the size of the holdings and the duration of holding. Transaction exceptions are no longer its core feature. Referring to this payment as points, benefits, or membership rights does not change the method of calculation. The explanatory documents from the Ministry of Finance clearly describe the prohibited interest as interest on held tokens, similar to that in savings accounts.

Hybrid activities are more complex. Users may earn 1% on each transaction, but this is contingent on maintaining a minimum balance for one month first. In this way, payments involve both a transaction component and a holding requirement. Companies can restructure the terms to make cashbacks solely dependent on consumption, or they can seek guidance to determine whether the relationship between the issuer and their application triggers indirect payment provisions. The draft does not provide an automatic safe harbor for common credit card-like programs simply because the term “cashback” is used in the advertising.

In its September submission, the Canadian Web3 Commission called for clear guidelines regarding rewards based on usage and transaction volume. The commission has opposed overly broad interpretations of indirect payments by issuers, arguing that this could affect regular loyalty programs. The current government draft generally accepts transaction rewards while retaining the possibility of conducting thorough reviews of earnings from token holdings funded by issuers. Both positions respond to a practical design dilemma: the same customer can use the same application to present "card-swiping incentives" and "interest-bearing cash balances" as two different products for sale.

In the United States, the final GENIUS Act rules for OCC come into effect according to a different schedule, and the proposed presumptions for certain third-party arrangements are revoked. The discussions also require a review of the specific reward terms. In Canada, the rules are based on consultations conducted in accordance with local laws; therefore, how a product is handled in the United States does not determine whether the same benefits are allowed in Canada.

Reserve funds and rewards are to be handled separately.

Emitters can generate income from qualified reserve assets, but they are not allowed to freely distribute this income as token holders' earnings for the stablecoins. The Ministry of Finance proposes that the market value of the reserve assets should reach or exceed the face value of the circulating tokens at the end of each trading day. Reserve assets must be held by qualified custodian institutions, which must be financial entities within Canada and must be separate from the assets of both the issuer and the custodian institutions themselves.

Regulatory requirements will require Canadian banks and trust institutions to play an important role, even if the tokens are issued by fintech companies. However, this does not mean that the banks necessarily own the stablecoins, nor does it imply that customers are holding traditional, insured bank deposits. Article 13 will prohibit issuers from promoting these tokens as legal tender, deposits, public insurance products, or government-backed products. Trust institutions involved in managing reserve assets will not convert the issuer's liabilities into the liabilities of the trust institutions themselves.

The Ministry of Finance stated that issuers are required to report to the Bank of Canada on a monthly basis, along with a certification from a registered accountant regarding the circulating tokens and their reserve value and composition. The daily coverage requirements and the monthly review address different issues. The monthly certification can provide independent verification at the time of reporting, but it cannot erase any gaps that may occur during the month. Issuers' own control measures must still ensure that coverage is maintained on a daily basis.

The Bank of Canada is also working on another type of digital currency. In September, six major lending institutions announced the launch of a shared tokenized deposit project, which will begin with transfers between participating financial institutions. Tokenized deposits represent money that the issuing banks owe to their customers, whereas bank stablecoins rely on a set of independent assets to support the issuer’s redemption commitments. Although both can be transferred through digital payment systems, their legal responsibilities and regulatory pathways are different.

According to the explanation in the 'Communiqué', Section 12 of Canada's 'Stablecoin Act' excludes stablecoins issued by financial institutions from the scope of this law. However, payment service providers that handle tokens issued by qualified banks and meet certain conditions may still fall under the regulatory jurisdiction of the 'Retail Payment Services Act'. Therefore, interpreting this proposed rule as a general permit for all bank-issued tokens would overlook the distinction between bank regulation and payment service provider regulation.

Reserves are particularly important during redemption runs and panics. Qualified assets may be safe under normal circumstances, but they may still need to be sold, transferred, or held until maturity in order to meet customer requests. The daily coverage rule examines the relationship between asset value and outstanding liabilities, while the three-working-day period rule assesses the availability of cash. The two cannot replace each other. Issuers may have sufficient assets on their balance sheets but still face settlement delays; the draft proposes a separate liquidity policy to address this gap.

Isolation arrangements also involve bankruptcy issues. If reserve assets are mixed with the company's general assets, once the company encounters problems, other creditors may interfere with the redemption process. The draft requires that reserve assets be separated from the issuer's and custodian's own properties, and specifies how they should be held. Even so, customers still need to understand their legal rights, who the managers are, and how long it will take to distribute the assets in the event of a real failure. A reserve report can only prove the endorsement status at a certain point in time and cannot guarantee that funds will be available continuously.

Redemption fees and exchange price spreads should also be distinguished. A maximum of 1% applies to the issuer's redemption fees. Exchanges may quote a purchase price below par value, and users may also face transfer or conversion fees before the funds are credited to their accounts. Those who buy at a price below par value can only redeem directly from the issuer if they follow the process published by the issuer; otherwise, a price spread may still exist. The most useful disclosures should clarify: who is allowed to redeem, through what channels, and when the cash will arrive in the customer's bank account.

Does redemption mean that one can withdraw cash immediately at any time?

The proposal requires that issuers must redeem stablecoins within three working days after a holder makes a request, regardless of the amount. The redemption fee shall not exceed 1% of the value. If the redemption amount is 1,000 Canadian dollars, calculated at the maximum rate of 1%, the fee would be a maximum of 10 Canadian dollars, and this does not include any additional fees that may be disclosed elsewhere in the payment chain. This calculation represents a maximum fee, and it is not a fixed fee that every issuer will charge.

The government stated that the three-working-day deadline takes into account the time required for T+1 settlement of Canadian securities and T+2 settlement of foreign currency securities, while also leaving room for processing. The working-day deadline is different from a 72-hour period that continues to be counted over weekends. The draft's precise wording requires completion within three working days, and companies also need to explain their own procedures in their public redemption policies.

If the issuer is unable to meet all requests due to insufficient liquidity in the market where its reserve assets are located, it may limit the daily redemption volume. This exception exists alongside the general obligations and does not allow for the refusal of withdrawals when demand is inconvenient. The policy must specify under what circumstances such restrictions can be applied, as well as the available payment methods. The company must issue a notice at least seven days in advance before increasing or starting to charge a redemption fee.

Even if the issuer promises to redeem at face value, the tokens may still be traded below face value on exchanges. Market buyers have to deal with fees, time requirements, and eligibility conditions before the funds are credited to their accounts. The three-working-day period is the minimum legal claim that qualified holders can make, not necessarily the purchase price that all exchanges are willing to offer immediately. If someone wants to use the tokens directly with merchants, they may need to consider the market price and the acceptance rules of payment applications before initiating a redemption.

The Canadian dollar CADD custody arrangements mentioned in the consultation report indicate that companies have already been attempting to distribute regulated stablecoins. The existing approval and endorsement arrangements will not automatically qualify for registration under the proposed federal system. Once the new rules are fully implemented, they will establish an approval process by the Bank of Canada for issuers within the scope of application.

The distinction between issuers and distributors may not be obvious to customers. Canadian applications can display wallets, complete identity verification, and show tokens issued overseas. Issuers are responsible for endorsement and redemption, while applications may independently perform regulated payment functions. If an application offers rewards, its financial arrangements may link the two. The wording regarding indirect earnings in the draft implies that issuers cannot assume that by outsourcing the consumer interface, they are exempt from their responsibility for balance-based promotions. Conversely, payment discounts provided independently by the platform do not automatically prove that the issuer has paid out the earnings associated with holding the tokens.

Consumers will become aware of these rules through disclosure and access, not just through a registration list. They need to know the issuer's legal name, the assets that underpin the redemption commitments, the redemption pathways, and the nature of any rewards. To refer to a token as "compliant with Canadian regulations" before the issuer is registered with the Bank of Canada would blur the distinctions between the existing arrangements and the proposed federal system. Rewards provided by intermediaries also require terms that specify who can make changes to them and whether such rewards remain valid after changes in the relationship between the platform and the issuer.

Foreign tokens and payment applications are also within the scope of application.

Canada's framework is not limited to stablecoins denominated in Canadian dollars. The Ministry of Finance stated that foreign non-financial issuers that directly or indirectly provide fiat-backed tokens to individuals within Canada will also be included in the federal issuer regime. Such companies may need to meet Canada's requirements for reserves and custody, or apply for exemptions when the rules of another jurisdiction are deemed substantially similar.

The Communique states that if provincial frameworks or foreign frameworks are deemed substantially similar, the Governor of the Bank of Canada may grant an exemption under Section 14 of this act, but additional conditions must be met. The Ministry of Finance has pledged to provide further clarification on how these systems will be assessed. Having an overseas license does not automatically qualify one to enter Canada, and the draft legislation does not list a list of acceptable foreign regulatory authorities either.

In addition, the proposed amendments to the 'Retail Payment Activities Regulations' will bring payment service providers that use regulated stablecoins for payment functions under this regulatory framework. Therefore, even if the same token appears in the same consumer interface, the issuer and the payment application may have different obligations. If the application promises cashbacks, the arrangements under Article 14 for the issuer and the payment service responsibilities of the application itself should be examined separately.

The registration process also includes a built-in national security review. The draft stipulates that the Minister of Finance has 60 days to decide whether to initiate the review after receiving an application, and this period can be extended by another 60 days if necessary; if the review is initiated, there will be further specified time limits for the review process. The outcome of the review may result in the Bank of Canada rejecting the registration. Having sufficient reserves alone does not determine whether an applicant is qualified.

The Bank of Canada will supervise registered issuers and may enforce laws regarding violations, including financial fines. The proposed fine ranges listed in the communiqué can reach up to C$1 million for serious violations and up to C$10 million for extremely serious violations. The proposed fine ranges do not imply that a particular incentive plan is already illegal; the final outcome depends on the official text and specific enforcement actions.

Registration is not just about audit reserves. The proposal requires the Bank of Canada to have control over ownership, governance, operational policies, and stablecoin terms, among other information, while the Minister of Finance can also intervene based on national security concerns. Even if a company meets the daily coverage ratio, it may still need to address issues related to applications or control. If a registered issuer launches a rebate campaign, it should not be interpreted as an excuse for unregistered distributors to bypass their own payment service requirements.

If Canadian users hold US dollar tokens issued overseas, foreign issuers face a particularly practical issue. These tokens may enter the market through exchanges without the issuer having directly targeted those customers. The draft includes "direct or indirectly accessible" in its description and contemplates granting exemptions for substantially similar systems. Subsequent guidelines from the Bank of Canada will determine how issuers should record the scope of their distribution and how to prove that regulations from other regulatory authorities provide comparable protection. Before an exemption mechanism is established, a foreign license alone will not solve many of these problems.

Rewards themselves can also come from different sources of funding. Merchants may contribute funds in order to acquire customers, wallet platforms may use their own marketing budgets, or issuers may share the income they earn from their reserve assets. The last scenario becomes more sensitive when the platform promises returns to holders, as the draft explicitly examines the issuer's relevant arrangements. A contract that specifies who contributes to the project, what triggers payments, and whether the balance affects the calculation formula contains much more information than a screenshot simply labeled “reward.” For regulations that are still in the process of soliciting feedback, these example structures do not automatically gain approval.

Banks and fintech companies have disagreements over whether to pay fees to holders

Some fintech companies hope to compete with bank products by transferring their reserve earnings to stablecoin users. Canadian financial institutions, however, support restrictions on such earnings, fearing that payment tokens that pay interest could draw funds away from deposits. Regulatory analysis by the Ministry of Finance has documented these differing views and has decided to maintain the ban, while allowing rewards linked to certain activities.

The strongest argument in favor of industry-supported incentives is not that every token should operate like a savings account. Payment networks often attract merchants and customers to their services through cashbacks and loyalty programs. If a rule considers all incentives as earnings, it would be difficult for stablecoin applications to offer standard payment promotions. Draft Article 14(1) leaves room for such situations in its wording.

The strongest argument in favor of government-imposed restrictions on tokens is that a token sold as a payment tool should be fully redeemable at its face value, have liquidity reserves, and there should be clear limitations on marketing methods. If the issuer promises returns based on the balance held by customers, it may lead customers to perceive the token as something similar to an insured deposit or investment product, which is not actually the case. The marketing ban outlined in the draft further emphasizes this distinction. These positions do not depend on whether the rewards are attractive to customers, but rather on what kind of economic activity the issuer is paying for and what product the users believe they are holding.

The proposed stablecoin framework in Singapore also considered similar interest payment restrictions, but its licensing and foreign issuer regulations were separate. International comparisons can only indicate similar regulatory concerns and cannot provide a unified global test framework. Canadian issuers and their partners still need to adjust their projects in accordance with the laws and regulations ultimately adopted by Canada.

Boundary changes may still occur during the consultation period.

The deadline of December 23rd gave companies time to clarify which aspects of the draft were clear and which existing reward models might fall somewhere between consumption and holding. The "Communiqué" is seeking public opinions on the proposed regulations and related payment service revisions. The "Stablecoin Law" itself already stipulates a ban on earnings, so opinions on the regulations cannot override this ban alone, but they can influence the wording or interpretation of transaction exceptions and arrangements made by issuers.

Companies planning to launch products should not promote that their specific reward products have been approved just because the draft generally allows for transactional payments. They can review the contracts connecting issuers, platforms, and merchants, and disclose exactly what actions enable customers to earn benefits. If the payment amount increases over time and with the balance, it will violate legal prohibitions; if the payment is only generated upon completion of a transaction, then the explicit exceptions in the draft apply. Hybrid projects particularly require careful design of their terms.

Therefore, Canada's response to the industry is more useful than a simple statement that "rewards are prohibited." Consumption rewards can exist; however, balance earnings paid by issuers or channelized through their arrangements are not allowed. The final boundaries will be determined by official regulations, as well as the source of funds for the actual products, marketing methods, and payment methods. The public comment period will end at 11:59 p.m. Eastern Time on December 23, 2026.

Worth noting

• Article 14: Pay attention to whether the final rules retain provisions for transaction exceptions and indirect arrangements by issuers.
• Project contract: To determine what actions will trigger rewards, and whether the issuer provides funds for the platform's balance-based payments.
• Registration Guide: Pay attention to when the Bank of Canada will open applications, as well as its criteria for identifying "substantially similar" foreign or provincial systems.
• Reserve and Redemption Terms: Compare daily coverage, Canadian custody, three working days redemption period, and any proposed redemption fees.
• Deadline for comments: Written opinions regarding the draft must be submitted by 11:59 p.m. Eastern Time on December 23, 2026.

Frequently Asked Questions

Can Canadian stablecoin issuers pay interest to holders?

The proposed framework retains the ban imposed by the Stablecoin Act on issuers from paying yields to token holders, but allows for rewards that are solely linked to transactions.

Can customers get cashbacks when using stablecoins for consumption?

Article 14(1) states that transaction-based rewards that are not linked to holdings do not constitute interest or income. However, the terms of specific cashback programs and the issuer's capital arrangements still determine how these rewards are applied.

Can the issuer pay the platform to have the platform pay interest to users?

The draft considers certain arrangements by issuers to be indirect payments if these arrangements allow or encourage others to pay benefits to token holders. Moving the payment path to the application layer does not automatically circumvent the ban.

When will the consultations in Canada end?

The deadline for comments provided by the Canadian Gazette is 11:59 p.m. Eastern Time on December 23, 2026.

How quickly must stablecoins be redeemed?

The proposal requires redemption to be completed within three working days after the holder makes a request; if the liquidity in the reserve market is insufficient to meet all requests, a specific daily limit may be established.

What is the proposed maximum redemption fee?

The redemption fee charged by the issuer shall not exceed 1% of the redemption amount. For example, for a redemption of CAD 1,000, the maximum fee is CAD 10.

Does the Bank of Canada hold reserves?

The draft requires that qualified custodian institutions must be financial institutions within Canada. Even if they are used for custody, it does not mean that non-bank tokens become insured bank deposits.

Are foreign stablecoin issuers also bound by this proposal?

Foreign non-financial issuers that provide fiat-backed tokens to Canadians may also be covered. If foreign regulations are deemed substantially similar, and upon the decision of the Bank of Canada, exemptions may be granted. The above information is for educational purposes only and does not constitute investment advice.