The Bank of Canada released a thirty-page report titled “Central Bank Digital Currency: Motivations and Implications” (CBDC) in November 2017. The paper starts off with a general discussion on Bitcoin and the underlying blockchain technology that has proved to be disruptive in several industries of late. Further, it explores the possibility of a government-led cryptocurrency effort and its practicality in comparison to something like cash.
While Canada is not exactly a pioneer in the cryptocurrency market the way Korea is, this report makes it clear that the Bank of Canada remains open to the idea of adopting digital currency principles to improve existing financial infrastructure. The paper states that its primary goal is to formulate or suggest a benchmark central bank digital currency “with features that are similar to cash.”
Canada is hardly the first country to push for a state-backed cryptocurrency though. In September 2017, the Reserve Bank of India indicated interest in a similar effort, citing concerns of fraud with existing digital currencies similar to bitcoin. Then, in October 2017, Russia also stated that it was considering the launch of a blockchain-based currency, dubbed the “CryptoRuble.”
With the growing popularity of major cryptocurrencies, including bitcoin and ether, and the diverse range of benefits that they offer, it is not clear what government-backed digital currencies will bring to the table for those who are already heavily invested in the cryptocurrency ecosystem. Furthermore, to the average person without the knowledge of the technology, migration of financial assets from traditional locations such as banks to a new digital currency will present itself as a long-winded and arduous process.
Bitcoin was released in 2009 with certain key principles, including being completely decentralized, anonymous and transparent. While companies have devised methods of analyzing the Bitcoin blockchain for transactional patterns, the cryptocurrency’s main selling point remains the aspect of decentralization. The lack of any government’s control over its functioning is undoubtedly one of the crucial factors that have led to its popularity in the several years since.
The CBDC paper acknowledges these shortcomings of a government-backed currency and shares similar concerns. It is already increasingly clear that this concept will come with a host of challenges, technical and otherwise.
On the plus side, however, such a cryptocurrency would be pivotal in reducing transactional overhead throughout the country. As it stands, financial institutions and corporations have a firm chokehold over the payments and remittance industry and have been thriving because of their long-established monopolies. The problems of high fees and long processing times can be easily remedied with a blockchain-based cryptocurrency instead.
Due to the absence of any third-party in a state-backed cryptocurrency, fees would be significantly lower, which would benefit both merchants and consumers. In the past, merchants have encouraged the use of cash to avoid paying a hefty premium on associated fees. Most of them have only relented because of the relative ubiquity of credit cards and recent reduction of fees.
Even if Canada decides to launch its own cryptocurrency, the actual implementation and release of such an endeavor are still pretty far out, maybe years even. The CBDC suggestion will have to be carefully evaluated and tested before it is ready for the public to begin using it in any capacity.