The Office of the Superintendent of Financial Institutions at the Bank of Canada recently announced that they are investigating the possibility of launching a bank-backed cryptocurrency. The bank released a report which stated possible advantages and disadvantages of the bank issuing their very own “central bank digital currency” (CBDC).
The report was penned by two prominent researchers in Canada's financial circles, Walter Engert and Ben S.C. Fung. Engert holds the position as the Office of the Superintendent of Financial Institution's Director of Research. Fung is current Director of Economic Research and Analysis at the Bank of Canada’s Currency Department. Both researchers seek to act as leaders in their respective departments.
In addition, the two researchers act as advisors to their respective departments on all matters pertaining to development and innovation in mainstream retail payment methods as well as their plausible influence on the public's demand for cash. Their position holds weight, especially as Canada still adjusts to the rising popularity of cryptocurrency. However, the report carries a disclaimer which states that the report is purely their own opinion, and cannot be considered the official stance of their respective agencies.
The report seeks to answer pressing questions in the face of the developing cryptocurrency industry such as whether central banks can be justified in supplying cash to only approved financial institutions. Essentially, the report asks the question of whether society will operate on a cashless basis in the future, and what the effects of this may be.
The report lists six different advantages that a bank can enjoy the moment its starts to issue its own digital currency. However, the researchers focused on only three advantages, which are:
- Cryptocurrency offers consumers a convenient payment method;
- A cashless society would be more financially inclusive; and
- With no demand for cash reserves, a cashless society will be more financially stable.
However, the report lists other advantages. According to the report, CBDCs would make online transactions more convenient. In turn, this will ensure that small business can conduct their services and payment methods online with ease. In addition, CBDCs are also likely to significantly reduce the costs associated with retail payments.
According to the researchers, financial inclusion will be a huge benefit for developing economies. However, they do state that this benefit will have a limited beneficial impact on Canada’s economic landscape, thus this benefit alone is not compelling enough to justify the implementation of CBDCs.
As for financial stability, the researchers state that CBDCs have the capability to provide consumers with a safer method of storing value, without becoming subject to the various risks in the financial environment of well-developed countries such as Canada.
According to the report, finance systems in well-developed countries, such as Canada, can pose various threats as all financial activity is dependent on banks, which carry out operations to enhance liquidity. This could often pose a threat to a country’s financial stability and CBDCs would prove an effective method to subvert the adverse effects.