The Bank of Canada is currently conducting an online public consultation on the characteristics of a possible digital Canadian dollar. But what exactly are we talking about?
Pushed from the back by cryptocurrencies and other private sector currencies, central banks around the world are considering whether to adopt and develop an all-digital version of their national currency. China is furthest along in developing what is called a central bank digital currency. Central banks in Japan, Brazil and Australia have also taken steps to launch a digital token as policy and monetary policymakers in the United States are divided between skepticism and fatalism, the agency reminds us. Reuters.
The Bank of Canada’s consultation with the general public runs until June 19. She wants to know the priorities of Mr. and Mrs. Everybody, their considerations related to the digital dollar, their probable uses or their concerns in terms of security, accessibility and respect for privacy. “At this time, we don’t see the need for a digital Canadian dollar. But as Canada may need it in the future, we must be prepared,” she adds.
With the pandemic accelerating the shift to digital, approximately one in five transactions were settled with cash in Canada in 2021. “Added to this is the almost daily appearance of new payment platforms that compete with the ‘cash. »
“It is also possible that the use of private cryptocurrencies or digital currencies from central banks of other countries will spread in Canada. This situation could compromise the role of a centralized official currency – the Canadian dollar – in our economy and pose a risk to the stability of our financial system”.
The central bank, however, would like to emphasize that “cash remains a reliable, safe and accessible method of payment that anyone can use, even without a bank account, credit score or official ID. She also wants to ensure that banknotes and coins will not disappear. While warning that “it is possible that one day, banknotes will no longer be widely used on a daily basis, which risks excluding a whole section of the population from the economy”.
Functioning
Such a dollar would be the digital equivalent of cash. It would not be a cryptocurrency, whose value fluctuates greatly, which may include transaction costs and require processing times. Moreover, a former deputy governor of the Bank of Canada has already recognized that stable cryptocurrencies backed by assets qualified as safe, for the most part fully or partially guaranteed, offer a little more stable purchasing power. That they have the potential to be widely adopted for everyday transactions. This does not prevent them from also being subject to the profit imperatives of the private sector and from offering little or no protection in the event of a reversal of fortune and embezzlement.
That said, the value of a digital dollar would not vary, since it would simply be an ordinary dematerialized dollar. It would be as simple and inexpensive to use as its cash equivalent. As for the operation, either it would be based on a transfer of money from the bank account to a card or a mobile application, or individuals and businesses could open an account at the Bank of Canada. “In either case, payments made in central bank digital currency would help ensure anonymity of the parties involved, as with cash, and traceability for law enforcement purposes, as with bank accounts. . »
Basically, it would work like current electronic means of payment. Except that it would not be linked to a commercial bank, as bank accounts and debit cards are, it is summarized.
Risks and Barriers
The Bank for International Settlements (BIS) has already explained this mechanism by recalling that the current payment system involves bill clearing operations to settle transactions and then transfer liquidity between the institutions involved with, as a pivot, a central bank playing the role of lender of last resort. The latter thus finds itself at the heart of the payments system in a role of neutrality, making its foreign exchange reserves the equivalent of a digital currency for the exclusive use of commercial banks. With a central bank digital currency, the intermediation step is avoided, the transaction being done in real time, directly on the balance sheet of the central bank, while lowering the transactional cost and the credit risk linked to the activity. compensation.
That said, there are still obstacles to overcome. It evokes the scenario of people keeping a good part of their money in this form rather than in a normal bank account. The result would be a decrease in the amount of money available for loans, an increase in borrowing rates, or both, with lending from banking institutions based in part on customer deposits.
In addition, a central bank digital currency could increase the risk of “bank runs”, especially in times of financial stress. “In theory, therefore, systemic bank runs could be both faster and more frequent,” which would alter the stability of the financial system.
Internationally, the BRI added in its summary that the thesis that such a centralized system would increase the efficiency of cross-border payments, if only by circumventing the rigidities of time zones, remains to be documented. To also respond to the concern of substitutions of digital currencies and to questions of compatibility, interconnection and integration within an interface between national payment systems.