Canada: Retail CBDC has plans, release time has not yet come

On February 25, Timothy Lane, Deputy Governor of the Bank of Canada, delivered a speech entitled "Money and Payments in the Digital Age" at the "Fintech RDV2020" conference held by the Montreal CFA Association. The Bank of Canada website also published " The report of the "Bank of Korea Digital Currency Contingency Plan" shows that in response to the needs of future world changes, the Bank of Canada has carefully considered retail-type CBDCs, but the timing for issuing such CBDCs has not yet come. At the same time, it was revealed that the Bank of Canada will soon release a series of research reports on the CBDC, including issuance motivation, ease of use, network security, information privacy, and issuance business model.

Timothy Lane, Deputy Governor of the Bank of Canada

 

I. Not considering the issuance of retail CBDC

 

In recent years, Canada, like many other countries, has gradually decreased the proportion of cash in daily transactions. According to a survey conducted by the Bank of Canada in recent years, the current number of transactions using cash accounts for 1/3, compared with 1/2 of 10 years ago. the above. In addition, 1/10 of those who use non-cash payment methods for daily transactions. The problems of high costs and long time in the regular trade and non-trade cross-border payments also provide possible living space for private cryptocurrencies and stablecoins.

In addition, in 2016, the Bank of Canada began to use the DLT technology of the R3 Alliance to develop the Jasper, a wholesale digital currency prototype system for domestic interbank payment and settlement. After several stages of follow-up verification, the Bank of Canada and the Singapore Monetary Authority jointly developed Jasper-Ubin in 2019. The project has successfully implemented the trial of applying CBDC in cross-border, cross-currency and cross-platform payments in the absence of intermediary agents. It can be said that the central bank of Canada has entered the stage of proof-of-concept-experimentation in the application of wholesale-type CBDC for large-bank inter-bank payment settlement and cross-border payment, and is at the forefront of international.

However, in the view of the Bank of Canada, the application of new payment technologies may be a new opportunity for consumers, enterprises and financial institutions to bring new benefits, but it may also cause new risks to the financial system. For example, stablecoins have the prospect of widespread popularity and the possibility of changing the current currency form and payment system. Therefore, the central bank believes that:

"There is currently no compelling reason to issue a CBDC. Canadians will continue to benefit from the existing payment ecosystem as long as it is modern and has the right purpose." (Timothy Lane, 2020)

Two scenarios for the release of CBDC , one must be cautious

 

Cashless scenario : similar to the situation in Sweden, where the whole society's cash use has fallen to a critical point, due to cost control considerations, more and more merchants refuse to accept cash, and banks also reduce cash services for the same reason, and consumers use cash Payment will become a problem. For example, in Sweden, many banks cancel daily cash services, and consumers with cash needs must make an appointment to access cash. The central bank believes that the use of domestic cash in Canada is not nearing a critical point, because consumers use credit card merchants to provide points rewards, which brings certain costs, so not all or most merchants currently refuse cash.

The central bank believes that the key issue is how to determine the lowest level of cash use in the whole society, which is the critical point that triggers the central bank's decision to issue a CBDC. This is a complex issue that must be carefully considered. Because the existence of cash brings consumers such safety, convenience, privacy protection, flexibility and competition, unless the cashless trend of the whole society has brought serious consequences, only then will the "BoC A digital CBDC equivalent to cash. This CBDC will be designed to have the same characteristics as cash. "(Bank of Canada, 2020)

Private currency scenario : The central bank is not worried about the possibility of private cryptocurrencies represented by Bitcoin as a means of payment:

"Because Bitcoin and other similar cryptocurrencies have high transfer costs, a lack of scalability, and unstable purchasing power, it is unlikely that they will play an important role in Canadian payments. So far, transactions completed using cryptocurrencies have been very limited According to our recent comprehensive Bitcoin survey, only 5% of Canadians currently hold Bitcoin (Canadian Bank of Canada, 2020)

The scenario is based on the prospects of stablecoins. The central bank believes that "the stablecoin may be the more likely spoiler." Because the stablecoin is secured by fiat money or a basket of assets, it improves the volatility flaws of private cryptocurrencies and has the potential for general promotion. The combination of user-scale social platforms like Facebook and stablecoin has brought huge challenges to the regulatory mechanisms of various countries. There may also be cross-border Canadian use of CBDCs issued by central banks in other countries in the future. The circulation of these digital currencies, which are not denominated in Canadian dollars, in Canada will violate the sovereignty of the Canadian national currency and bring about the following serious effects:

Consumer spending power depends on the value of digital currency units that the Bank of Canada cannot influence;

The Bank of Canada ’s main monetary policy tool, the “Target Canadian Dollar Overnight Rate”, will not affect current lending rates and domestic economic activity;

Policies regarding the function of the central bank's final lender can only be formulated by foreign central banks that provide currency.

The central bank believes that in the case of such "substantial erosion of the Canadian dollar's public interest", it will consider issuing a CBDC. But before making such a decision, you must also consider whether there are two kinds of risks: one is whether the issuance of the CBDC will affect the stability of bank deposits or increase the risk of bank runs; the other is whether the CBDC will become money laundering or terrorist financing And other carriers of illegal activities.

Design characteristics of retail CBDC

 

The central bank believes that the design of the CBDC is very important and should help promote the application to the society and achieve the goal that most people are willing to hold, at least in some transactions. Should have the following characteristics:

Similar to cash : real-time settlement between people, non-anonymous, and flexibility to adapt to infrastructure failures.

Online digitization : it can be used online without being stolen and illegally used, and it can adapt to new electronic transactions.

Accessibility : It should be scalable and able to adapt to various interfaces used by consumers such as smartphones, smart watches, personal computers, the Internet of Things, etc., and provide offline device support from the perspective of inclusive finance and enhanced flexibility Access.

No interest for the time being : No interest is expected on retail CBDCs. If interest calculation is implemented, the issue of interest calculation for offline users needs further study.

High payment security : The security considerations of the CBDC against system failures and cyber attacks are at the core of its design. The central bank will release a special report in the near future.

Consider both payment privacy and information disclosure : It is feasible to create a CBDC with good privacy and compliance with KYC / AML and other regulations, but it will not take cash anonymity as its design goal. "Any acceptable design of the CDBC needs to include some controls to ensure compliance with existing laws while providing sufficient privacy." The central bank will also release an in-depth study in this area in the near future.

Integration with existing payment systems: Interoperability with existing payment systems, that is, connection with other payment systems can be exchanged back to the CBDC, and it can also provide payment and transfer services for the CBDC.

The central bank believes that although in many cases the Canadian public values ​​the convenience of the future CBDC over other core features such as privacy, security, and resilience, the design of the CBDC must still focus on these features.

Preparations for issuing a CBDC

 

The central bank has proposed a high-level strategic approach to issuing CBDC, and has achieved " a state of readiness " for the future issuance of CBDC, so that once the time comes, a decision to issue CBDC can be made.

Government support : Government legislation is required to explicitly grant the central bank the authority to issue CBDC.

Strengthen communication : The central bank should strengthen communication with the government, enterprises, and end users to understand the impact of CBDC on the policy objectives of various government agencies, the impact on participating financial institutions in the CBDC ecosystem, and the needs of enterprises and end users. The motive and design choices for the distribution were discussed extensively with these groups.

Public consultation : Prior to this, the central bank has conducted focus group activities on the issuance of CBDC, indicating that the public has certain needs for CBDC. The next round of public consultation will guide the public to understand CBDC and its differences from other digital currencies, understand the public's preferences and models for CBDC, and collect their opinions.

Monitoring and early warning : The central bank will establish a regulatory framework to continuously monitor the emergencies in the use of cash and private digital currencies to determine trigger points and make full preparations for the preparation of the CBDC issuance and even the official issuance.

Technology selection : From now on, the basic work of CBDC technology research and development is started. Partners are not limited to the private and public sectors. Selecting and testing an appropriate technology may take several years. The report mentioned that “Canada Bank will continue to examine the scheme of centralized and decentralized issuance of CBDC”, indicating that there is still an unknown possibility for the central bank to issue retail CBDBDC.

Appendix (Bank of Canada report):

Money and Payments in the Digital Age-Bank of Canada https://www.bankofcanada.ca/2020/02/money-payments-digital-age/

Contingency Planning for a Central Bank Digital Currency-Bank of Canada https://www.bankofcanada.ca/2020/02/contingency-planning-central-bank-digital-currency/