Recently, the Bank of Canada said that it had no plans to issue a central bank digital currency. However, the central bank’s deputy governor revealed that they were laying the groundwork for a CBDC. This way, if the need ever arose due to a change in the payment infrastructure, they would be ready.
What the Deputy Governor Said
The Deputy Governor, Tim Lane, gave a speech at a business conference in Montreal recently. During the speech, he said the bank had established there was no compelling reason to issue a CBDC at this time. However, he did reveal that this could change in the future. He outlined two scenarios that would compel the bank to change its policy.
In the first scenario, there would need to be a major reduction in the use of physical cash or the elimination of physical cash altogether. In the second scenario, privately issued cryptocurrencies would have to make serious inroads into the Canadian economy to challenge the dominance of the national currency.
The CBDC it would issue would operate in the same manner as the existing Canadian dollar. However, it would only exist in digital form and its supply would be controlled by the central bank. This is unlike Bitcoin, which has decentralized governance and is maintained through mining.
Contingency Plan – Central Bank Digital Currency
He noted that currently, Canada was well served by the existing payment systems. The official added that the existing ecosystem was in the process of being upgraded for the modern world. According to him, the development of a CBDC would take several years. The Bank of Canada also released a detailed contingency plan for the issuance of a digital currency.
The contingency plan concluded by noting that a CBDC could play an important role in helping the bank to achieve its policy goals. These goals are universal accessibility, privacy, competition, resilience, safety, and monetary sovereignty. It also stated that the bank would conclude research into a CBDC transparently in consultation with stakeholders both locally and abroad. Additionally, the central would hold public presentations on any conclusions and issues that emerge.
A recent study by the Bank of International Settlements found that more central banks were actively researching the issuance of CBDC. While most of those working on such projects are in emerging economies, China is the largest economy that is close to issuing a CBDC.
Summary
While the bank is years away from possibly issuing a CBDC, developments in the global economy could force its hand. For instance, if China issues a CBDC and it helps boost the efficiency of its economy many times over, the bank might have to reconsider its current outlook.
In the next two or three years, several central banks, especially those in South East Asia, might be forced to adopt a CBDC to remain compatible with China’s economy. China has a lot of economic influence in the region and central bankers there might not wish to be disadvantaged when it comes to trade with China.
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