Central Bank Digital Currency:
Do we need it?
A summary by Jeff Eder
July 18, 2021
How does the implementation of CBDC improve the lot of the average citizen?
The short answer is it does not, although it may be a preferable medium of exchange as an alternative to cash (banknotes). We already have digital bank money which can be exchanged for banknotes and coins, we do not need another layer of complexity in our banking and monetary system. Rather, the public needs to have more control over what money is created for and how it is distributed. One such proposal has been put forward by Progressive Money Canada. https://progressivemoney.ca/
Cryptocurrencies in the private sector are mainly used as speculative instruments (get rich quick) and there are several other problems associated with it:
- It is a dirty currency because of the energy requirements needed to mine crypto and governments are starting to take notice. An ongoing study by Cambridge University provides estimates of energy use by Bitcoin. https://cbeci.org/
- The volatility of cryptocurrencies that are not backed by a country’s currency make it a poor replacement for cash.
- Another concern is the scalability issue. Many of the most popular cryptocurrencies are not scalable either in transaction time, value, or the amount of power needed to process them. Bitcoin already has a lot of difficulties when it comes to the amount of time and computing power needed to provide proof-of-work for a transaction. The more transactions happen, the worse the problem gets.
- The lack of safety nets available if you get scammed or hacked.
- Acceptance from the average citizen
- Can be used to avoid paying taxes, see endnote 2 or read Crypto Used To Avoid Paying Taxes below this article.
How does the Bank of Canada view cryptocurrencies?
The Bank of Canada will consider launching a CBDC if certain scenarios materialize or appear as if they are likely to. A CBDC could become beneficial or even necessary, if:
- the use of banknotes were to continue to decline to a point where Canadians no longer had the option of using them for a wide range of transactions; or
- one or more alternative digital currencies—likely issued by private sector entities—were to become widely used as an alternative to the Canadian dollar as a method of payment, store of value and unit of account.
In either of these scenarios, a CBDC could be one way of preserving desirable features of the current payment ecosystem, such as universal access to secure payments, an acceptable degree of privacy, competition and resilience. The second scenario in particular would constitute a significant challenge to Canada’s monetary sovereignty—the ability to control monetary policy and provide services as lender of last resort. Other scenarios could arise, and the Bank will closely monitor developments in the payment sector to determine whether a CBDC is warranted.
The Bank of Canada is responsible for preserving the value of money and for supplying Canadians with bank notes (i.e., cash). It is also responsible for overseeing systemically important and prominent payment systems to ensure they are safe and efficient. To effectively carry out those responsibilities, the Bank must be ready to adapt to the changing nature of money and payments in Canada.
Central bank cash (banknotes) supports all of these features and public policy objectives. As a liability of the central bank with the full backing of the government, central bank cash is the safest form of money. It can still be used in a wider range of transactions despite its declining use by Canadians. Cash is the only truly anonymous payment instrument in the sense that it allows Canadians to make purchases without sharing any personal information. Given its physical nature, cash is an extremely resilient method of payment that can be used for in-person transactions even when the physical infrastructure that other mechanisms rely on is compromised (e.g., because of a power outage, or worse a powerful geomagnetic storm like the Carrington Event). Finally, cash supports competition in the payment ecosystem by providing a low-cost, reliable, and ever-present alternative to private sector payment methods.
Having a national currency as the dominant unit of account improves the efficiency of trade and promotes growth of the national economy. It also underpins the central bank’s ability to conduct independent monetary policy and act as a lender of last resort to protect financial stability. So, while changes in the mix of payment methods—such as the progressive switch from bank notes to cards—has not challenged monetary sovereignty, widespread use of a payment instrument not denominated in Canadian dollars would seriously put it at risk.
1. The Bank of Canada published “Contingency Planning for a Central Bank Digital Currency” on February 25, 2020. https://www.bankofcanada.ca/2020/02/contingency-planning-central-bank-digital-currency/
All content in my summary related to the Bank’s position on CBDC comes from this publication.
2. Canada’s blockades make it clear: Crypto can be a form of shadow banking — and needs a crackdown The Globe and Mail Published Feb. 14th, 2022 By Tim Kiladze