Intelligence

No digital loonie—yet

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The Bank of Canada doesn’t yet see a “compelling case” to issue its own digital currency, deputy governor Timothy Lane said Tuesday in a speech at the CFA Montréal FinTech RDV 2020 conference. However, the central bank is laying the groundwork for the introduction of such a coin should the situation change. Here’s what you need to know:

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What it could be: A digital version of the Canadian dollar that anyone could use.

Why the BoC isn’t issuing it now: “Banknotes remain available to Canadians who want to use them,” said Lane, according to a copy of his speech provided to journalists in advance. He also highlighted the BoC’s efforts to improve existing payment systems, such as its backing for Payments Canada’s new network for the real-time settlement of small transactions. “Based on this, you may imagine paying for groceries as you pick them off the shelf, [or] ordering and paying at your favourite shawarma truck by tapping your phone to a code on the menu,” said Lane. The BoC is also working with its British and Singaporean counterparts on cross-border payments; all three have explored the use of blockchain and its generic form, distributed-ledger technology, for large-value settlements between financial institutions. 

Then why are we even talking about this?: In June 2019, Facebook announced its proposal for a global digital currency called Libra. If consumers began to use a tech giant-issued coin for many of their transactions, it would “erode competition and privacy and pose an unacceptable challenge to Canadian monetary sovereignty,” Lane said Tuesday, referring to the central bank’s ability to influence the country’s economy by, for example, setting interest rates to try boost growth or control inflation. Regulators and policymakers have raised concerns about Libra’s consumer protections, its anti-money-laundering controls and its potential effects on financial stability. Facebook’s announcement prompted a G7-led study of stablecoins, which are pegged to the value of assets like traditional fiat currencies, commodities or assets. In a June 2019 report, the Financial Stability Board, an umbrella group for monetary authorities, called for national authorities to work on new regulatory approaches to decentralized financial technology. In his speech Tuesday, Lane said Libra has the “potential to reach billions of people” because it would “run on an existing messaging platform with strong brand recognition,” though it is “tough to predict if Libra will ever live up to its promises or even come into existence.” But the BoC isn’t just worried about Facebook. Widespread adoption of multiple stablecoins would make it harder for consumers and merchants to conduct business, since they might be using different ones. A popular digital currency from another government—the People’s Bank of China, for example, which plans to launch one this year—could also pose a threat. In those cases, the BoC would consider issuing its own.  

Bye bye, banknotes: Canadians’ use of cash is declining, the BoC noted in a briefing paper released alongside Lane’s speech—just 33 per cent of transactions at point of sale involved physical currency in 2017, down from 54 per cent in 2009, and those purchases tended to be smaller. If consumers are no longer able to use banknotes to buy things, private-sector payment providers would have more power to set high fees, and the unbanked would have limited financial options. The paper points to Sweden, where declining cash usage has “triggered public discussion of a [central bank digital currency].” That’s another scenario in which the BoC would consider issuing a virtual coin, although Lane emphasized it’s not looking to hurry the disappearance of physical currency. 

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What next: Canada’s central bank has been researching digital currencies for more than six years. Lane’s speech marks the beginning of preparations to issue one, if the institution and policymakers ever decide it’s necessary. That involves talking to the federal government, as well as the agencies responsible for issues like privacy, about the legislative changes necessary for a launch. The BoC will also begin consulting with industry on the coin’s design and underlying technology—which won’t necessarily be blockchain—as well as how it could be integrated into existing financial and payment systems. It plans to launch “a progression of experimental pilot projects” to test different options. It’s also joined five other central banks and the Bank of International Settlements to look at use cases for sovereign digital currencies and figure out how to make them interoperable; the group is scheduled to meet in Washington, D.C. in April.

The when: There’s no set timeline for the BoC’s project. “The Bank would require several years of work to get to the point where it would be possible to issue a [digital currency],” the briefing paper notes, so “foundational work will begin immediately.”