Canadian Financial Institutions Analyze Feasibility of Central Bank-Issued Digital Currencies

The Bank of Canada's Office of the Superintendent of Financial Institutions has released a report which examined the benefits and disadvantages of the central bank issuing its own digital currencies. Such currency would be called “central bank digital currency” (CBDC).

The research report was prepared by two senior researchers - Walter Engert, Senior Director, Research - ‎Office of the Superintendent of Financial Institutions Canada, and Ben S. C. Fung, Director of Economic Research and Analysis in the Currency Department of the Bank of Canada. Their main role is to provide leadership in the department’s economic research program.

Engert and Fug also provide advice to the department on issues related to developments in retail payments and their implications for the demand for cash. This is important, because even though the authors noted that the report is their opinion alone, and not necessarily the position of the bank, their advice carries weight.

Part of the report reads:

"Is it sufficient for a central bank to supply only reserves to qualified financial institutions? Put differently, is a 'cashless society' a sound outcome?"

Other highlights of the report

Based on the document, there are six possible benefits that a central bank can reap via the issuance of a virtual currency. The authors primarily focused on three advantages, however: payments for consumers, financial inclusion and financial stability. According to them, CBDCs would lessen friction for online payments and cause smaller merchants to provide services over the Internet. Central bank-backed cryptocurrencies could also reduce costs for retail payments, according to report.

The authors argued that financial inclusion may greatly benefit the economies of developing countries, but will have limited impact in advanced economies like Canada.

"Financial inclusion does not provide a compelling motivation for CBDC in most advanced economies, including Canada.”

For the financial stability benefit, the authors claimed that the CBDCs can offer consumers a safe way to store value without confronting the risks currently facing the financial systems of advanced countries like Canada.

“The financial systems in Canada and other countries feature highly leveraged banks conducting liquidity and maturity transformation and operating at the core of the payment system. It is well known that under some conditions this setup can be unstable, and in severe cases, the stock of inside money can contract, with adverse negative externalities for the economy."

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