A Bank of Canada (BoC) employee published a staff working paper on the prospects of a central bank digital currency (CBDC) for Canada. The paper outlines the benefits and compares monetary policy in a system where both cash and a CBDC are present.
Cryptocurrencies issued by central banks or governments go against the decentralized, original nature of the first digital currencies like Bitcoin. Nonetheless, as interest in the sector grows banks look to leverage not just the technology but also the potential of digital currencies themselves.
A central bank digital currency could mean more monetary policy control, says paper
The paper, a research document containing purely the opinion of the BoC employee and author, concludes that the economic gains of introducing a CBDC could be as much as 0.64% for Canada.
The employee models a monetary system where conventional cash and a CBDC exist and the effects on and of monetary policy. S. Mohammad R. Davoodalhosseini concludes that a CBDC could give a central bank better control over monetary policy.
A CBDC is more easily monitored than cash in an economy, he argues, therefore allowing monetary policymakers more impact.
“This is because the central bank can monitor agents’ portfolios of CBDC and can cross-subsidize between different types of agents, but these actions are not possible if agents use cash,” said the report.
Though he also says that some consumers could be dissuaded from using a CBDC, exactly due the centralized nature and lack of anonymity versus decentralized coins like Bitcoin and Monero.
Davoodalhosseini explores how a CBDC in an economy without cash would be even more beneficial, However, there are still enough positive benefits when high-value transactions are conducted with a CBDC and cash is used for lower-value transactions.
“By eliminating cash, central banks can stimulate the economy in downturns via setting negative nominal interest rates,” outlines the report, citing an argument by K.S Rogoff author of “The curse of cash.”
The BoC has a history with CBDCs
The Bank of Canada’s chair Stephen Poloz does not, as of yet, support the idea of a CBDC. In an interview with CNBC in January 2018 he likened digital currencies to gambling.
“They are not assets really … I suppose they are securities technically … There is no intrinsic value for something like bitcoin so it’s not really an asset one can analyze. It’s just essentially speculative,” said Poloz.
The recent working paper is not a sign that the BoC is currently investigating a CBDC, but the bank is indulging the research of its employees in this area, showing there is likely to be some internal debate occurring around CBDCs. A prior BoC working paper was published by authors Walter Engert and Ben S. C. Fung in December 2017, considering the “motivation and implications” of a CBDC.
Before the cryptocurrency craze hit, though, the Royal Canadian Mint developed a cryptographically secure digital version of the Canadian dollar back in 2012. The pilot, called MintChip, and its underlying technology, was sold to Nanopay in 2016 and is now being used as the basis for digital improvements to the interac e-transfer system.
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