Question: I know of someone who has just lost their wallet with their driver's licence in it. This person has reported their wallet as stolen and the police have informed this person that they can still drive even though this person has their licence stolen and they told this person that if they get pulled over that the licence is already reported stolen? I am a little confused on this.
Is it true that if a person has their wallet stolen and reports it to the police they can still drive? Isn't it the law to have your licence with you on your person at all times no matter what when driving and if a licence gets stolen then it's not OK to not drive until it's returned or replaced?

Producing Your Driver's Licence to Police
You are correct, it is an offence to operate a motor vehicle on a highway if the driver cannot produce their driver's licence.
33 (1) Every person, except
(a) a person driving or operating a motor vehicle exempted under section 2 (5) or section 8 or 10, or
(b) a person driving or operating a motor vehicle of a fire department of a municipality,
must have his or her driver's licence and driver's certificate and a motor vehicle liability insurance card or financial responsibility card, issued for the motor vehicle he or she is driving or operating, in his or her possession at all times while driving or operating that motor vehicle on a highway, and must produce the licence, certificate and card for inspection on demand of a peace officer.
Officer's Discretion to Ticket
Practically speaking, if the driver can satisfy the officer that the licence has been stolen, usually by supplying the file number for the report, it is unlikely that the officer will choose to ticket them. However, if this is a month or two after the fact and the driver has not replaced the licence then I can see a ticket being written at that point. In all cases, it is up to the officer involved.
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Comments
... is surely what's important, you would expect.
Being able to produce a license when requested enables a police officer to determine (a) that you actually have one - also that it's valid and applicable to the vehicle being driven - as well as (b) who you are and where you live, etc.
There's a useful page on the ICBC site to help a person to replace a lost or stolen license.
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The rationale behind the law ...