Where in the world were the streets paved with water?

A city of canals, like Venice or Amsterdam, might seem a good guess, but the Word, were, in the question clearly reveals that "paved" is meant literally, not figuratively. Noting that, it becomes clear that the question is an allusion to the American-authored novel, Hans Brinker; or, the Silver Skates: A Story of Life in Holland.

So it is was Holland--today, The Netherlands--where, as the story goes, time was when canal "streets" were paved with water (ice).