Bank of Canada Research Report: CBDC can promote digital innovation

A research paper released by the Banque Of Canada, Canada’s central bank, suggests that the country could benefit from its own central bank digital currency (CBDC).

The report acknowledges a number of potential benefits of adopting a CBDC, such as the fact that the technology could have the same level of security as cash while allowing for a payment system that could be used for online transactions and peer-to-peer transfers. A CBDC would also not necessarily impose the same types of transaction fees on retailers compared to payment methods such as credit or debit cards: “CBDC could be a simpler competition policy tool as it would provide an alternative low-cost payment instrument for customers and merchants. This would help reduce the transaction fees charged by existing networks”.

The researchers believe that smart contracts pose some risks to users because smart contract developers may be independent of the bank's CBDC platform. This could be problematic if the execution of the contract does not follow the agreed terms, either intentionally or unintentionally. They suggest that further research is needed on smart contracts and the programmability of Canada's CBDC before deciding on implementation.

“Overall, we conclude that CBDCs could be beneficial and may be necessary to ensure a competitive and vibrant digital economy,” the report reads.

The report lays out two scenarios that could lead the bank to issue a CBDC at a future date. One scenario would be if, for unspecified reasons, citizens no longer widely use cash in the country. The other scenario would be if a public or private digital currency became so widely adopted that it threatened the sovereignty of Canada’s existing central bank currency.

Neither scenario is a likely outcome in the near term. Interest in stablecoin regulation and adoption has increased within the country in recent months. Even so, the study found that cryptocurrencies and stablecoins being used as a means of payment in Canada are still relatively new.

Canada is not the only country considering implementing a CBDC. Last week, Federal Reserve Chairman Jerome Powell said in a speech to the House of Representatives that if there is a digital dollar, there is no need for stablecoins or cryptocurrencies. A paper focusing on the benefits and risks of a digital dollar is expected to be released sometime in September.

The Bank of Korea has selected Ground X, the blockchain subsidiary of South Korean internet giant Kakao, as the preferred vendor to build a pilot platform for its central bank digital currency (CBDC), with the deal scheduled to be completed by the end of July and the pilot program set to begin next month.