Bank of Canada Paper Announces Benefits, Risks of a Central Digital Currency
Earlier this month, the Bank of Canada released a paper summarizing their investigation into the benefits and risks of a creating a Central Bank Digital Currency (CBDC).
The paper is, at a minimum, a sign that the central bank is exploring the possible use of blockchain technology. Members of the digital currency community took this as a vote of confidence for blockchain technology.
The paper, authored by Walter Engert and Ben Fung, sums up their research. It does not necessarily reflect the opinion of the Central Bank.
Inside the Bank of Canada white paper
The paper outlines many of the benefits of creating a digital currency.
Cash transactions are on the decline and a CBDC could be the next step towards a cashless society. The paper states that, “…the use of bank notes relative to other payment methods in Canada… declined consistently for the past 25 years.”
The decline in banknote use threatens the bank’s core revenue stream, seigniorage, which is the profits made from printing more money. A CBDC could allow them to maintain seigniorage income through creating digital cash.
Unfortunately for central banks, a lack of seigniorage is one of the many arguments for digital currencies like Bitcoin. These currencies have a fixed circulating supply, meaning there is no profit from printing more. Users storing their value in Bitcoin do not have to worry about a government issuing more Bitcoin, for instance.
Saving money for consumers
Currently, cash transactions have the lowest costs for consumers and merchants. Debit and credit transactions are more convenient for many, but there is a cost associated with these service for both consumers and merchants.
A CBDC may offer a better alternative.
A CBDC would have no transaction fees, which would allow for cost-effective online payment solutions. The costs os online payment services can hinder some merchants, and a CBDC could allow smaller merchants to accept online payments.
A CBDC could also help with financial inclusion. This is not necessarily a priority in Canada, where the whitepaper reports 98% of people have a bank account.
Financial inclusion is, however, an important topic in underdeveloped countries where citizens do not always have access to banks. A government-backed electronic method of storing value could open new avenues of financial freedom for citizens.
There is also the potential for a CBDC to reduce crime and criminality. The paper states that large banknotes are often associated with criminality and their reduction could lead to a decline in criminal activity.
Drawbacks of an anonymous CBDC
The paper states, “as a practical matter, complete anonymity seems to be undesirable for central bank digital currency”.
Countering their point on reducing criminality are concerns that the anonymous nature of a CBDC could make it easier for criminals to anonymously store and transfer money. One solution to this would be a limit on the amount of money a digital wallet holds. However, the paper noted that an enterprising criminal could possibly gain access to multiple wallets.
The paper concluded with a note that more research is necessary to decide if a CBDC is best for the central bank of Canada.
This paper, therefore, is by no means a roadmap for Canada’s new digital currency. However, it is an interesting moment in the history of digital currencies, as Canada explores the possibility of having its own CBDC.
Image credit: Wikimedia Commons
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