Bank of Canada thinks now is a good time to research their own digital currency. Although the name remains unknown, they are not the first financial institution to contemplate such an approach.
Central bank digital currencies are a very unusual development in the financial sector. So far, no major bank has made any significant progress in developing such a currency. Bank of Canada may be the first to achieve some breakthrough in this regard. A paper has been circulating which focuses on creating a native digital currency.
However, in Canada there is still an active Bitcoin community. Bank of Canada has taken notice of this growing interest in cryptocurrency in the country and devised its own countermeasures. It remains unclear if and when the central bank will issue a digital currency, though. For now, this option is merely being explored. Nothing has been it in stone just yet, and it may never even happen in the end.
The Bank of Canada's Office of the Superintendent of Financial Institutions has released a report which examined the benefits and disadvantages of the central bank issuing its own digital currencies. Such currency would be called “central bank digital currency” (CBDC).
The research report was prepared by two senior researchers - Walter Engert, Senior Director, Research - Office of the Superintendent of Financial Institutions Canada, and Ben S. C. Fung, Director of Economic Research and Analysis in the Currency Department of the Bank of Canada. Their main role is to provide leadership in the department’s economic research program.
Engert and Fug also provide advice to the department on issues related to developments in retail payments and their implications for the demand for cash. This is important, because even though the authors noted that the report is their opinion alone, and not necessarily the position of the bank, their advice carries weight.
The authors primarily focused on three advantages, however: payments for consumers, financial inclusion and financial stability. According to them, CBDCs would lessen friction for online payments and cause smaller merchants to provide services over the Internet. Central bank-backed cryptocurrencies could also reduce costs for retail payments, according to report.
The authors claimed that the CBDCs can offer consumers a safe way to store value without confronting the risks currently facing the financial systems of advanced countries like Canada.
“The financial systems in Canada and other countries feature highly leveraged banks conducting liquidity and maturity transformation and operating at the core of the payment system. It is well known that under some conditions this setup can be unstable, and in severe cases, the stock of inside money can contract, with adverse negative externalities for the economy."
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