Every day, while employees at the Bank of Canada grapple with the best way to tame inflation or shield the financial system from risk, a small group of researchers, cryptographers and engineers gets to ponder a more abstract question: what is the future of money?

For years, the bank has been developing contingency plans for a world in which value moves around much differently than it does today. Since the release of the Bitcoin white paper in 2008, digital currencies issued by private firms or individuals have become worth trillions of dollars—posing a potential challenge to currencies issued by governments. Some influential voices believe central banks should issue digital currencies of their own to counter that threat. 

In practice, however, the task of actually designing the technology behind how that currency would operate—should the Canadian government decide to issue one—is in the hands of a small team of about 15 professionals at the Bank of Canada, led by Dinesh Shah, the bank’s director of fintech research. 

Their task is to consider how a digital loonie could fit into a vastly different monetary future and how such a technology might eventually be rolled out to millions of Canadians. 

“It’s a mistake to think about this just as a product we may want—or may not want—to get out there very quickly in the marketplace,” Shah told The Logic in an interview. “We really have to have a horizon of 10 years at the minimum, I would say, given what kind of a substantial product this would be”—meaning the bank is trying to consider how technology might change in the decade after the launch of a CBDC, with potential advances in fields like quantum computing and homomorphic encryption.

The team working on the initiative includes staff with deep expertise in cryptography and security, as well as user-experience specialists and solution architects whose job is to unite the different pieces, Shah said.

The Bank of Canada has said it sees no need for a CBDC just yet. That could change if the use of physical cash declines further or if a privately issued digital currency becomes widely used, deputy governor Timothy Lane said last year. Even so, the decision to issue one ultimately rests with the government, a bank spokesperson said. 

Recently, though, the bank’s research on CBDCs has accelerated. In October 2021, Lane said the effort had progressed from a research phase to a test phase, signalling its interest had moved beyond the purely theoretical. The bank could begin building test models for some of its designs as soon as next year, Shah said.

The central bank’s work comes as other nations including the U.S. and U.K. explore issuing a CBDC. In January, the U.S. Federal Reserve launched a review that examined the potential tradeoffs involved in creating one; however, some officials have voiced skepticism about the initiative. China, meanwhile, has already begun testing a digital yuan. 

The Bank of Canada’s staff seem to be probing the effects of a CBDC from every possible angle. Since it started looking into the technology almost a decade ago, it has published reams of research on topics ranging from the cash holdings of Bitcoin owners to the effect of a CBDC on bank liquidity ratios.

Some questions around the CBDC’s design appear to be largely settled. According to Shah, it would be “extremely unlikely” for the currency to be built on top of a public blockchain network, such as Ethereum or Bitcoin. However, Shah’s team is still examining how integrated it would need to be with other digital currencies, depending on how that ecosystem develops.

Other considerations include how to make sure a CBDC can be interoperable with cash. One option, Shah said, is to provide a way for people to exchange cash for digital currency through a bank branch. 

As it seeks for answers on its design, the Bank of Canada has tapped the private sector for input. Equitable Bank CEO Andrew Moor and Wealthsimple CEO Michael Katchen told The Logic earlier this year that both of their companies had been in touch with the bank about CBDCs.

“I’ve always been a believer that [CBDC is] a really interesting thing for central banks to do,” Katchen said. “I think the challenge is how do you do it? How can a central bank do it in a way that benefits from the open-platform nature of the crypto economy so that others can program on the network, others can participate in it, and it’s an open network, it’s not just built for the existing financial incumbents?”

Bank of Canada spokesperson Paul Badertscher told The Logic the bank has engaged with stakeholders such as financial institutions, payment-service providers, merchants, consumers, civil society groups, federal government departments and other federal agencies. 

“This outreach is still in its early stages, and is helping the bank improve its understanding of the broader implications of a CBDC, and inform its policy and design thinking,” he said.

The CBDC project has already proven to be a political lightning rod for the bank, at a time when it is facing criticism for failing to prevent high inflation. Pierre Poilievre, the frontrunner to lead the federal Conservative Party, has said that he would oppose a CBDC, arguing that it would add to the government’s surveillance powers and unfairly compete with the private sector.

While the CBDC’s design will ultimately be based on parameters set by policymakers, Shah said the currency would provide “maximum privacy”—but not anonymity, as other currencies promise. Compliance laws mean the government will always have a way of knowing who is using the digital currency, Shah said. 

“We never say anonymity because we don’t really think that’s on the cards, given the laws we have to abide by,” Shah said.