Research shows Canada’s CBDC can fuel digital innovation in the country

A study published by Canada’s central bank Banque du Canada found a number of good reasons why the country could benefit from its own central bank digital currency, or CBDCs.

The document outlines two scenarios that could result in a bank issuing a CBDC at a later date. One would be if people in the country no longer use cash for unspecified reasons. The other could be when a digital currency, whether public or private, is so widespread that it threatens the sovereignty of Canada’s existing reserve currency.

Participants do not see either scenario as a likely outcome in the near future, but note that interest in regulating and adopting stablecoins in the country has increased in recent months. Still, research has shown that cryptocurrencies and stablecoins used as a means of payment in Canada are currently “novel to a small number of enthusiasts”.

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The document recognizes some of the potential benefits of adopting CBDC. In particular, the technology could have a similar level of security as cash and at the same time enable use in payment systems for online transactions and peer-to-peer transfers. Compared to payment options like credit or debit cards, CBDCs also don’t necessarily incur the same transaction fees for retailers:

“CBDC could be a simpler competition policy tool as it would be an alternative, low-cost payment tool for customers and merchants. This will help reduce the switching fees charged by established networks. “

Also of interest is the ability of CBDCs to support smart contracts as they can increase the speed and accuracy of execution by automating actions that are normally performed manually. However, participants felt that smart contracts would pose some risk to users as the smart contract developers would likely be independent of the bank’s CBDC platform. This can be problematic if the performance of the contract, intentionally or otherwise, does not meet the agreed conditions. They indicate that smart contracts, as well as the programmability of the Canadian CBDC, need further research before a decision is made about implementation.

There are many benefits to creating a CBDC for Canada. Research explains:

“Overall, we believe that CBDCs can be beneficial and potentially necessary to ensure a competitive and dynamic digital economy.”

Canada isn’t the only country considering the possibility of a CBDC. Last week, before speaking to the House of Representatives, Federal Reserve Chairman Jerome Powell said there would be no need for stablecoins or cryptocurrencies if there was a digital US dollar. An article on the benefits and risks of the digital dollar is expected to be published in September.