In recent years, the Bank of Canada has been running on the logistics of an imaginable central bank virtual currency: a purely virtual form of the Canadian dollar. While the decision whether or not to launch a CBDC rests with the federal government, the central bank has said it needs to prepare for this eventuality, especially as Canadians increasingly use virtual payment strategies in their daily lives.
Here’s how a CBDC could work and why the Bank of Canada is creating one.
A retail CBDC is essentially a digital version of physical cash. Like cash, CBDCs are issued by central banks, and their value is tied to a national currency. One Canadian CBDC would equal one Canadian dollar, and it could be used for in-person and online purchases, as well as payments between businesses. It could also be transferred between people.
Most cash is already virtual, and there are many electronic payment systems in place. Think of the numbers on the screen when you check your bank account balance or the cash transferred from your account to the grocery store account when you tap your debit card. There are also cryptocurrencies, a form of virtual currency that is subsidized by a central bank.
CBDCs differ from that other virtual currency bureaucracy because they are a direct right to the central bank, like a physical dollar bill. They don’t want a bank account, monetary establishments can still play a role in distributing CBDCs and processing transactions, just as they do cash, depending on the design of the virtual currency.
“As with banknotes, Canadians do not need identification, a bank account or to disclose personal details to conduct fundamental monetary transactions,” the Bank of Canada’s website says.
One way or another, the Bank of Canada has been assessing the dangers and benefits of implementing a national virtual currency for several years, especially as virtual marketplaces and cashless notes grow in popularity. The COVID-19 pandemic has only accelerated this trend. as more Canadians shop online while staying at home.
“Since COVID-19 hit, there has been a growing hesitancy in Canada to use cash,” then-Deputy Governor Timothy Lane of the Bank of Canada said in 2021.
The bank is also adapting to advances in the PC generation. Cryptocurrencies, such as Bitcoin, are not widely used as a means of payment; they are necessarily speculative assets. But the generation that backs cryptocurrencies can still have a significant impact on how currencies work, and the central bank needs to stay on top of those new developments.
Central bankers are also wary of private forms of digital money displacing national currencies in online marketplaces. Most cryptocurrencies are far too volatile to be used in everyday payments. But other types of digital assets, including “stablecoins” — whose value is typically pegged to something more stable, like national currencies or the price of gold — may grow in popularity.
In 2019, Facebook (now called Meta) announced plans to create its own virtual currency called Libra (later renamed Diem). The task was scrapped in 2022. But it has raised the stakes for central bankers securing their position at the center of the economy. payment system.
The Bank of Canada is yet to announce the main express points on how a Canadian CBDC will work, but it has discussed some ideas. In a 2019 article, the bank said it could be account-based, where Canadians can simply open an account. to move your cash as a virtual, or value-based currency, where cash can be transferred directly from your bank to a physical card, virtual wallet, or phone app, similar to managing a PayPal account or prepaid credit card.
The bank said it has won feedback from teams that a Canadian CBDC deserves to not require a web connection for use. If the bank chooses this route, your virtual wallet will be stored directly on a card, account, or phone app, which you can use to transfer cash to other users or pay businesses directly. Users also wouldn’t want any identity or bank account interacting with a Canadian virtual currency.
While its studies on CBDCs drove the reduction of the use of physical currency in payments, the Bank of Canada has stated that it has no plans to phase out money as it remains the most productive currency available in terms of security. Accessibility and privacy. A Canadian virtual currency aims to provide some of those benefits in conditions where money can’t be used, such as in buying groceries online or in cashless businesses.
“Our responsibility is to provide Canadians with bank notes they can trust,” the bank said. “We’ve done this for almost 90 years, and we’re committed to issuing bank notes for as long as Canadians want them.”
Some countries around the world have followed a core virtual currency in one form or another. In 2020, the Bahamas was the first country to launch a trendy CBDC, which they dubbed the “sand dollar. “Ten other countries have introduced CBDCs and 21 others, such as India, China, Australia, and Sweden, have begun testing virtual currencies in pilot projects.
Reports from the Bahamas suggest that its sand dollar is still not used very often. According to a 2022 report by the International Monetary Fund, only 0. 1% of the currency used in the country is its CBDC, and very few traders settle for it. The eNaira virtual currency, introduced in 2021, is experiencing a similarly low adoption and usage rate.
Federal Conservative leader Pierre Poilievre has strongly opposed the concept of a Canadian virtual currency and said he would introduce a CBDC if his party shaped the government. He has emerged in the afterlife as a supporter of personal cryptocurrencies such as Bitcoin.
In an online survey published in November by the Bank of Canada, a majority of respondents said they were concerned about the privacy of a digital currency, compared with the anonymous benefits of physical cash. The bank said it is looking into options for a CBDC that would not require a user to divulge personal information or have a bank account.
Last December, the Canadian Bankers Association stated that the goals and benefits of a Canadian CBDC have not yet been clearly stated and that it could simply lead to potential risks for the monetary sector. Critics have questioned the need for a CBDC in Canada, especially since many of its potential benefits are already provided through personal banks, adding bank transfers, online shopping, and virtual payments.
The main fear of advertising banks is that CBDCs could undermine their business model. Right now, banks rely on deposits for much of the cash they lend to make a profit. If Canadians were to keep most of their savings in the form of CBDCs rather than a bank account, it may simply have an effect on bank funding and potentially increase the charge and minimize the availability of loans. To decrease the likelihood of CBDCs competing with bank deposits, the Bank of Canada has stated that a potential virtual dollar account would not earn interest.
Another fear is that CBDCs may simply increase the threat of bank runs, where other people rush to withdraw their cash from advertising banks when they believe the banks are unstable. In its 2019 paper, the Bank of Canada stated that, in theory, CBDCs could simply make those transactions faster and more frequent, as it can make it less difficult for consumers to move their cash.
“We could end up in a scenario where a central bank virtual currency, or making the monetary formula more stable, would make it less stable,” said Bank of Canada adviser Stephen Murchison. “Fortunately, crises in the entire banking formula are incredibly rare in fashionable times. In fact, Canada has never had one.
Despite all its studies and public reports, the Bank of Canada will not publish a CBDC until a Canadian government votes on and approves the project, which is not being debated lately. Potentially, that may never happen, however, the bank says it needs to get ready in case priorities change. Within the bank itself, studies have yet to see if a CBDC can even solve the disruptions presented to them.
“Ultimately, Canadians will decide, through their representatives in Parliament, whether it merits the issuance of a virtual dollar,” the bank says on its website.
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