Canada is among the world’s most cashless societies and its people and businesses are eager adopters of digital banking and payment options. More than three-quarters of Canadians now rely entirely on digital channels to conduct most of their banking, according to recent polling by the Canadian Bankers Association (CBA), and electronic payments represented 79 per cent of all transactions, accounting for 15.8 billion transactions in 2020[i].
We now firmly live in a networked and tech-enabled world, and so it’s no surprise that the most popular financial transaction methods are now all digital mobile and contactless. The pandemic has only accelerated the shift to digital and led to increased willingness to explore alternatives to physical cash, such as cryptocurrency. To be sure, a dizzying array of cryptocurrencies has launched in recent years, from the pioneering Bitcoin to Ethereum, Tether, and hundreds of others, even so-called “meme coins” with little to no legitimacy. Alternative digital currencies are revolutionary in their intent, but they are also inherently volatile, risky, and unregulated. This was on full display in 2022 when a steep downturn in cryptocurrency prices led to what many refer to as the “crypto winter” and several once-vaunted crypto exchanges collapsed, leaving retail crypto investors exposed to significant losses.
With the rapid rise of digital currencies and significant advances in the technology supporting financial services, authorities in Canada and around the world are working to understand the potential impact these innovations may have on the financial sector. Indeed, many have voiced significant concerns surrounding the growth of cryptocurrencies as they relate to the adverse effects on consumers and the broader financial system. It has also led to extensive research and discussions on whether introducing a digital version of a dollar is a viable policy response to risks posed by widespread adoption of an alternative private digital currency.
What future for a CBDC in Canada?
Rapid developments and emerging public openness to digital currencies has accelerated work by central banks around the world, including by the Bank of Canada (BoC), on the potential issuance of a Canadian retail central bank digital currency (CBDC). The BoC’s rationale behind this is that the day may come when Canadians can no longer readily use cash for everyday transactions, or when an alternative private digital currency becomes widely adopted. While the BoC has stated that it does not see a need to issue a CBDC at this time, the BoC has suggested that either scenario could be the tipping point when a CBDC may be needed and therefore research into its potential attributes, function, and its effect on Canadians and the broader economy, including the financial sector, should begin today.
A CBDC is basically digital money issued by a central bank. If a Canadian CBDC were issued, individuals and businesses could use it to pay for products or services using a mobile phone or a special card or device. It would be like cash but also able to be used online. This official digital currency would retain its face value in Canadian dollars because it is issued by the BoC, just like bank notes.
We believe that the potential benefits of a CBDC to address concerns about the widespread adoption of alternative digital currencies and cross-border payments inefficiencies warrants further examination. If a retail CBDC were to be issued in Canada there could be wide-reaching implications for the economy, the financial system, and the BoC’s operations. That’s why it’s important to proceed intelligently and with caution to maintain trust and stability in Canada’s financial system.
A clear policy rationale is needed
The CBA and its members question the purpose of a retail CBDC in Canada. While there may be some upside to issuing a retail CBDC the policy objectives for issuing it have so far not been clearly established and verified considering the risks to the stability of the financial sector.
The policy rationale to support the issuance of a CBDC is highly contextual and can vary for individual jurisdictions depending on several factors such as stability and trust in the financial sector and the existing payments ecosystem. In Canada, the presumed efficiency gains offered by a retail CBDC may be immaterial because the current retail payment solutions are safe, convenient, efficient, reliable, and have earned the public’s trust over time. Collectively, Canada’s banks have made significant investments to increase the efficiency and convenience of payments more generally, from Interac e-Transfer, mobile and digital wallets, and convenient online and app-based banking to contactless payments and more efficient ways to send remittances, to name a few. This is in addition to the ongoing efforts Canada is taking to modernize our country’s payment infrastructure.
We believe the policy objectives and potential benefits of issuing a CBDC must therefore be clearly established and verified, particularly when weighed against the risks to the financial sector, such as potential impacts on bank funding. Most notably, a key risk arising from the issuance of a retail CBDC is the potential impact on bank deposit disintermediation, including repercussions for banks’ source of funding and their ability to provide credit. This is particularly relevant for smaller institutions who may be materially impacted by changes in sources of funding. Second, depending on its design and technical aspects, a retail CBDC also gives rise to concerns surrounding privacy, financial crimes, and the security and resilience of the overall CBDC system. Third, it is also likely that a retail CBDC could be anti-competitive and therefore undermine initiatives intended to increase competition and innovation in the financial sector, such as Open Banking or payments modernization.
Canada’s banking sector stands ready to engage with stakeholders as they assess the impact of a digitalization of money to the stability, integrity, and security of the financial industry while at the same time promoting an environment that fosters competition and innovation to ensure Canada’s financial sector is in a strong position to harness the benefits of a digital and data-driven economy.
With that in mind, the CBA has identified key policy considerations that we believe the BoC and other involved parties should consider as it continues its work on the potential issuance of a CBDC in Canada.
- The reason to issue a retail CBDC must be clearly established and the risks and benefits to the financial sector carefully assessed. A retail CBDC should not undermine the trust that Canadians have in the financial system, nor should a CBDC be viewed as a panacea to address policy issues to which other alternative solutions may already exist or could be addressed by the private sector. Moreover, the issuance of retail CBDC should not impede or restrain innovation and competition in the financial sector.
- Stability of the financial sector should not be undermined by the issuance of a retail CBDC. Ensuring a stable and efficient financial system is a core function of central banks and it is crucial that the potential disintermediation risks that may rise because of a retail CBDC are addressed, including the impact on bank lending.
- A retail CBDC should not undermine ongoing projects, like payments modernization, that are currently in development. Canada is in the process of modernizing the clearing and settlement systems and building a new platform for retail payments (the Real-Time Rail), which will provide Canadians with faster, more efficient and more secure payment options. While there have been delays, once launched this multi-phase project will result in a better payments infrastructure in Canada. If the BoC were to issue a CBDC, the associated technology should not compete with private sector solutions and should be interoperable with future payments systems and their underlying technology.
- Commercial bank solutions, together with effective regulation and oversight of alternative digital currencies, could be effective in addressing the BoC’s concerns surrounding the displacement of the Canadian dollar. Canada’s payments system is realizing the benefits of collective efforts and investments banks have made to enhance the general efficiency and convenience of payments. We believe with the increased convenience today and with planned future enhancements, the likelihood of widespread adoption of alternative currencies remains low in Canada in the near term.
- A retail CBDC system must strike the right balance between protecting Canadians’ privacy and preventing financial crimes. A potential CBDC system presents a dichotomy between privacy and preventing financial crimes, which could risk Canadians’ trust in a CBDC system. Given the concerns around financial crimes, it is unlikely a Canadian CBDC will be able to offer the same level of anonymity and privacy as physical cash. Assessing whether the right balance between safeguarding privacy of consumers and the appropriate level of transparency to deter financial crimes can be achieved is a critical aspect of the BoC’s contingency planning efforts. If Canadians do not trust a Canadian CBDC or perceive the BoC does not adequately address privacy concerns, public adoption of a CBDC could be negatively impacted.
- Ensuring the resilience of a CBDC system in Canada is paramount to maintain the trust Canadians have in the financial sector. Beyond potential compromises to an individual’s CBDC holdings, a CBDC ecosystem could be a high-value target to threat actors. Operational resilience and the implementation of cybersecurity controls and safeguards should be foundational elements of a potential CBDC system. Like existing payments systems in Canada, all stakeholders should apply the highest standards of security and data protection, including the entities involved in the issuance and distribution of a potential Canadian CBDC.
- The issuance of a CBDC is one of many policy alternatives that could be considered to enhance cross-border payments. Addressing the pain points related to cross-border payments is a complex issue that banks are working to address in coordination with public and private stakeholders. Developments in real-time payments systems, adoption of ISO 20022 standards, implementation of solutions by SWIFT, as well as addressing interoperability, are just some examples of the ways in which the impediments related to cross-border payments can be addressed.
- The potential issuance of a CBDC should be considered as part of the broader policy discussions impacting the financial sector. The banking sector is already undergoing considerable change through initiatives like payments modernization and the increasing digitalization of the sector. In addition to regulatory oversight of new entrants, we encourage the BoC to take a holistic approach when assessing the impact of CBDCs on banks, in conjunction with other policy initiatives that are currently impacting the banking industry and/or are likely to have an impact in the future.
[i] Payments Canada, Canadian Payment Methods and Trends Report 2022