Have you ever looked at a cashback offer on a payment app and wondered whether the company is really paying you for spending or quietly paying you just to keep money sitting there? That exact question now sits at the center of Canada’s latest stablecoin proposal. On October 24 the government published draft regulations that draw a clear line: rewards linked to an actual transaction can go ahead, but any payment that grows simply because tokens stay in a wallet is treated as prohibited yield. The distinction sounds simple until you start reading the contracts behind loyalty points, merchant rebates, and income-sharing deals with platforms.
Why Canada Drew This Particular Line On Stablecoin Rewards
I’ve spent enough time following payment regulation to know that blanket bans rarely survive contact with real products. Canadian officials heard that message loud and clear from both fintech firms and traditional banks. A total ban on every form of incentive would have made ordinary merchant promotions almost impossible. At the same time, letting issuers treat stablecoins like interest-bearing savings accounts raised obvious concerns about how customers would view the product. The compromise that landed in the Canada Gazette is therefore deliberate: activity can be rewarded, balances cannot.
Section 14 of the draft is the heart of the matter. It states that a payment or reward tied to a stablecoin transaction, and not tied to holding the token, does not count as interest or yield under the Stablecoin Act. The next paragraph reaches further. If an issuer enters an arrangement that lets another person earn income from holdings or encourages that person to pay yield to holders, the issuer itself may be treated as paying yield indirectly. In other words, outsourcing the consumer interface does not automatically wash the issuer’s hands.
The consultation window runs until December 23, 2026. That deadline matters because the text is still only a proposal. Issuers cannot treat the October publication as an operating licence or a green light for any particular loyalty scheme. Firms and consumer groups still have time to flag language that might accidentally capture ordinary rebates or leave loopholes for disguised balance payments. The final regulation could shift.
Transaction Rewards Versus Holding Yield In Practice
Picture a customer who pays a merchant with a regulated Canadian stablecoin and immediately receives a small rebate. That looks like a classic transaction incentive. Now change one detail: the same customer only receives the rebate after maintaining a minimum balance for thirty days. Suddenly the payment has both a spending component and a holding condition. The draft does not supply a neat checklist of approved promotions. It supplies a boundary that companies must apply to their own program terms.
A fixed percentage returned on each completed purchase fits the language more cleanly than a monthly bonus calculated on the lowest balance held during the period. Both might be marketed as “cashback,” yet they are economically different. I’ve found that marketing labels rarely decide these questions. Regulators tend to look at the calculation that actually produces the reward and the contracts that fund it.
A payment tied to a transaction but not to holding is not interest or yield. An arrangement that encourages another party to pay holding yield can still be treated as the issuer’s indirect payment.
Loyalty points create a similar factual puzzle. Points awarded once for each purchase are not automatically interest simply because the customer can later redeem them. Points credited daily in proportion to a stablecoin balance rest on a different economic base, even if the word “interest” never appears. Conversion rates into tokens, cash or discounts affect the value of the reward, but the draft’s main test is why the reward accrued in the first place.
How Intermediaries And Income Sharing Fit The Rules
The law focuses on issuers, yet section 14(2) closes an obvious route through third parties. If an issuer agrees to let another person receive yield from holding its stablecoin, including through income sharing, that arrangement can be treated as indirect yield. The same paragraph catches an agreement that encourages the other person to pay yield to the coin’s holder. Saying “the app paid the customer, not us” does not settle the question when the app is funded to do exactly that.
There remains a genuine boundary for independently funded promotions. A merchant might discount purchases paid in a particular token without any arrangement involving the issuer. A platform might fund rewards from its own marketing budget. The draft’s indirect-yield clause asks whether an arrangement involving the issuer exists. It does not turn every payment by every third party into the issuer’s payment. Firms still need to examine the contracts behind each offer.
Consider a rebate split between issuer and merchant. The merchant reduces the price at checkout while the issuer reimburses the merchant for bringing new payment volume. If the customer receives the same discount regardless of the balance left in the wallet, the activity appears tied to a transaction. Contract terms still matter. A side payment that grows with the customer’s average holdings would raise the separate question under section 14(2). Regulators can follow the money rather than accept a marketing description at face value.
Reserve Requirements Stay Completely Separate From Rewards
An issuer can earn income on eligible reserve assets without being free to pass that income to holders as yield. The Finance Department proposes that the market value of reserves must meet or exceed the par value of outstanding tokens at the end of every day. Those assets must sit with qualified custodians that are financial institutions domiciled in Canada and must remain segregated from both the issuer’s and the custodian’s own property.
That custody requirement hands Canadian banks and trust companies a significant operational role even when a fintech issues the token. It does not mean the bank owns the stablecoin or that a customer holds a conventional insured deposit. Section 13 would bar marketing that suggests the token is legal tender, a deposit, publicly insured or government-backed. A custodian’s involvement in managing reserves does not convert the issuer’s liability into the custodian’s deposit liability.
Monthly reports to the Bank of Canada, accompanied by a certified accountant’s opinion on the value and composition of outstanding coins and reserves, add another layer of oversight. A monthly opinion can check the position at a reporting date; it cannot erase a shortfall that appeared mid-month. Daily coverage remains the issuer’s continuous responsibility.
Perhaps the most interesting aspect is how this framework sits alongside bank-issued tokenized deposits. Six large Canadian lenders have already explored a shared project for tokenized deposits moving between institutions. A tokenized deposit represents money already owed by the issuing bank. A non-bank stablecoin relies on a separate pool of assets backing a redemption promise. The legal liabilities and supervisory paths differ even when both instruments move through digital payment rails.
Redemption Rights And Practical Limits
The proposal requires an issuer to redeem any holder’s stablecoin on request, regardless of amount, within three business days. The redemption fee cannot exceed one percent of the redeemed value. On a C$1,000 redemption that cap equals C$10 before any other disclosed charges in the payment chain. The figure is a ceiling, not a fee every issuer will charge.
Officials note that the three-business-day window accommodates settlement of Canadian securities on T+1 and foreign-denominated securities on T+2, plus ordinary processing time. A business-day deadline differs from a continuous 72-hour clock that runs through weekends. Companies will still need to publish clear redemption policies explaining their own steps.
An issuer may impose daily limits when market liquidity for reserve assets is insufficient to meet every request at once. That exception sits beside the general obligation; it is not a standing permission to refuse withdrawals whenever demand feels inconvenient. The published policy must describe the circumstances in which limits may apply and the payment methods available. Any introduction or increase of redemption fees requires at least seven days’ public notice.
A coin can still trade below par on secondary markets even when the issuer promises redemption at par. Market buyers face fees, timing and eligibility hurdles before cash arrives. The three-business-day right is a floor for an eligible holder’s legal claim, not a guaranteed instant bid on every exchange. Someone trying to spend the coin at a merchant may care more about the market price and the app’s acceptance rules than about formal redemption.
Foreign Issuers And Payment Apps Under The Same Framework
Canada’s approach is not limited to coins that reference the Canadian dollar. Foreign non-financial issuers that make fiat-backed stablecoins available to people in Canada, whether directly or indirectly, fall inside the federal issuer system. Those firms may need to meet Canadian reserve and custody requirements or seek an exemption where another jurisdiction’s rules are judged substantially similar.
The Bank of Canada’s governor could grant exemptions under the Act when a provincial or foreign framework meets the substantial-similarity test, subject to conditions. Further guidance on how those regimes will be assessed is still promised. An overseas licence on its own is not an automatic passport. The draft does not publish any pre-approved list of foreign regulators.
Separately, proposed amendments to the Retail Payment Activities Regulations would bring payment service providers that perform payment functions with prescribed stablecoins into that oversight regime. The issuer and the payments app can therefore carry different obligations even when the same coin appears inside a single consumer interface. If an app promises cashback, both the issuer’s section 14 arrangements and the app’s own payment-service responsibilities need separate examination.
A national-security review forms part of the registration process. The finance minister has sixty days after receiving an application to decide whether to review it, with a possible sixty-day extension and a further defined period if a review begins. That review can lead to an instruction that the Bank of Canada refuse registration. Meeting the daily backing ratio alone will not decide whether an applicant qualifies.
Competing Views From Banks And Fintech Firms
Some fintech firms want room to compete with banking products by passing reserve income through to stablecoin users. Canadian financial institutions have generally supported a restriction on yield, worried that an interest-paying payment token could pull balances away from traditional deposits. The Finance Department’s analysis records both sets of views and its decision to keep the statutory prohibition while opening space for activity-based rewards.
The strongest industry case for rewards is not that every token should behave like a savings account. Payment networks have long used rebates and loyalty programs to attract merchants and customers. A rule that treated every incentive as yield could make ordinary payment promotions difficult. Section 14(1) in its current form accommodates that commercial reality.
The government’s strongest case for the holding restriction is that a token sold as a payment instrument should remain fully redeemable at par, backed by liquid reserves, and marketed without deposit-like claims. An issuer that promises a balance-based return may encourage customers to treat the coin as something closer to an insured investment than it actually is. The draft marketing ban reinforces that distinction. These positions do not turn on whether a reward feels attractive; they turn on the economic activity the issuer is paying for and the product the customer believes they hold.
What The Consultation Can Still Change
The December 23 deadline gives firms time to explain where the draft is clear and where existing rewards models sit awkwardly between spending and holding. Comments cannot repeal the statutory yield prohibition itself. They can influence how the transaction exception and the issuer-arrangement language are ultimately written or clarified.
A company planning a launch should not advertise that its particular rewards product has already received approval simply because the draft allows transaction-based payments in principle. It can examine the contracts linking issuer, platform and merchant, and disclose which action actually earns the customer money. If a payout rises with time and balance, it faces the statutory ban. If it arises only on a completed transaction, the draft’s express exception becomes relevant. Mixed programs will need especially careful terms.
Canada has therefore offered the industry something more useful than a simple “rewards banned” headline. Spending rewards can exist. Balance yield paid by an issuer or channelled through its arrangements cannot. The precise boundary will be settled by the final text and by the way real products are funded, marketed and paid. Comments close at 11:59 p.m. Eastern on December 23, 2026.
Key Practical Questions For Issuers And Platforms
- Does the reward arrive only when a merchant sale completes?
- Does the amount grow because more coins remain in the wallet for longer?
- Can the user remove the balance immediately after the purchase and still keep the benefit?
- Is there any contractual link between the issuer and the party that actually pays the customer?
- Are program records detailed enough to show the calculation behind every award?
Answers to those questions reveal more than any promotional percentage. An issuer may still advertise a generous annualized equivalent for rewards earned through spending; the form of the advertisement cannot change the actual conditions of payment.
How A Programme Could Cross The Line Without Realizing It
Take a payment app that offers one cent for every dollar spent at participating shops. If the customer receives it only when payment clears and holding more tokens does not change the reward, the program looks like the transaction-based payment described in section 14(1). That example illustrates the clause; it is not a program Canada has approved by name.
Now change one condition. Suppose the app pays four percent a year on coins left in a wallet and requires a monthly balance snapshot. The amount now grows with the size and duration of the holding. The transaction exception no longer describes its central feature. Calling the payout points, perks or a membership benefit cannot alter the calculation. The explanatory statement expressly describes prohibited yield as interest on coins held, similar to a savings account.
A mixed campaign is harder. A user might receive one percent of each purchase but only after maintaining a minimum balance for a month. The payout then contains both a transaction component and a holding condition. A company could restructure the terms so spending alone determines the rebate, or seek guidance on whether its relationship with the app triggers the indirect-payment clause. The draft contains no automatic safe harbour for a familiar credit-card-style program merely because the advertisement uses the word “cashback.”
Reserves, Liquidity And The Reality Of Redemption
Eligible assets may be safe under ordinary conditions yet still need to be sold, transferred or allowed to mature when customers request redemption. The daily coverage rule tests value against outstanding liabilities. The three-business-day deadline tests access to cash. One does not substitute for the other. An issuer could hold enough assets on paper and still face settlement delays. A separate liquidity policy is supposed to close that gap.
Segregation also addresses an insolvency question. If reserve assets are mixed with a company’s general assets, other creditors may complicate the route to redemption after a failure. The draft requires separation from the issuer’s and custodian’s own property and sets out how reserves may be held. A customer would still need to understand the legal claim, the administrator, and the time it takes to distribute assets in a real failure. A reserve report is evidence of backing at a point in time, not a guarantee of uninterrupted access.
A redemption fee and an exchange spread should also be kept conceptually separate. The one-percent cap applies only to the issuer’s own redemption fee. An exchange may quote a bid below par, and a user may face transfer or conversion charges elsewhere. Someone who buys below par might be able to redeem directly with the issuer only if eligible under the published process; otherwise the price gap can persist. Clear disclosure of who can redeem, through which channel, and when cash reaches a bank account remains the strongest practical protection.
What Consumers Should Watch For
Consumers will encounter these rules through disclosure and access as much as through registration lists. They need to know the issuer’s legal name, the assets backing the redemption promise, the eligible redemption route, and the true nature of any reward. Calling a token “Canadian compliant” before the Bank of Canada has registered its issuer can blur the difference between an existing arrangement and the proposed federal regime. A reward offered by an intermediary also needs terms that identify who can change it and whether it survives a change in the platform’s relationship with the issuer.
In my experience, the most useful questions a customer can ask are simple. Does the reward arrive when the payment clears? Does it grow if I leave the coins sitting longer? Can I empty the wallet right after the purchase and still keep the benefit? Those answers usually reveal more than any annualized percentage printed on a marketing screen.
Looking Ahead To Final Rules And Implementation
The consultation remains open. Final wording on section 14, the precise treatment of issuer arrangements, and the Bank of Canada’s registration and exemption guidance will all shape how programs are designed. Reserve and redemption terms will continue to sit alongside the rewards rules rather than being folded into them. Implementation is expected to follow once the consultation closes and any revisions are complete.
For now the draft gives the market a workable starting point. Spending can be incentivized. Simply holding cannot. The difference will be decided less by slogans and more by the contracts, calculations and funding flows that sit behind every offer. Firms that treat the distinction seriously from the outset will be better placed when the final regulation lands.
The conversation is far from finished. Written comments are due by 11:59 p.m. Eastern on December 23, 2026. After that the real test begins: turning a carefully drawn boundary into programs that customers, issuers and regulators can all understand.
