By Erik Henningsmoen , Justin Ratcliffe

The Bank of Canada recently solicited public feedback on a future digital Canadian dollar. The short survey sought Canadians’ perspectives on digital currencies, including the public interest in using them, security and privacy concerns, the ability to use them when not connected to the internet, and other desired features. The Bank of Canada will use this feedback to inform future decisions about a digital Canadian dollar. Not sure what a “digital Canadian dollar” is or what benefits or risks it might have? This article introduces the concept of a digital Canadian dollar and outlines five things you should know about digital currencies.

What Are Digital Currencies?

The digital Canadian dollar would be a Central Bank Digital Currency (CBDC). CBDCs are a digitized form of a national currency issued by a central bank. While best practices in the design of a CBDC are still an open discussion, CBDCs are generally seen as being equivalent to the national currency (i.e., cash) but are instead stored in a digitally accessible and secure manner by the central bank. While blockchain technology could be part of a digital currency’s technical infrastructure, it is not required.

A digital Canadian dollar could significantly change Canada’s payments landscape, including how Canadians conduct financial transactions in their daily lives. Research on CBDC has identified benefits and possible risks, too. We’ve summarized five key takeaways below:

1) Canadians are using less cash; a CBDC would give Canada another payment alternative.

Canadians are using digital payment methods, like debit and credit, more often for their purchases, particularly following the COVID-19 pandemic. Payments Canada notes that cash transactions in Canada are in a multi-year decline; cash transactions have decreased by 18% over the past five years, and this trend is expected to continue. Moneris, a Canadian payment processing company, forecasts that by 2030 cash will account for only 10% of the total value of monetary transactions in Canada. Credit, debit, and mobile payment options have become the norm for Canadians.

2) Issuing a CBDC could improve the financial inclusion of Canadians without a bank account.

According to the Bank of Canada and the US Federal Reserve, adopting CBDC could help those who currently rely on cash for their transactions. In Canada, the unbanked (those without a bank account) represent nearly 6% of residents, or 1.5 million households. A digital currency would allow people without a debit or credit card to carry out cashless and online transactions, improving their financial inclusion.

3) Adopting a CBDC could help Canadians fully participate in retail’s digital future, making transactions faster and safer.

Retail transactions in Canada are changing as e-commerce as online sales become more prevalent. In 2021, e-commerce sales accounted for $65 million, or 8.7% of all retail sales, and have been rapidly increasing since 2017. Further, recent research conducted by ICTC explores how the retail sector in Canada is digitalizing and becoming more intelligent. ICTC’s industry survey found that many retail operators expect “cashierless” stores, contactless shopping, and a reduction of physical stores in the next five to 10 years.

4) The presence of a CBDC can help bolster and encourage financial technology innovation.

A digital Canadian dollar could create positive spillovers for fintech innovation. A 2018 white paper looks at how this technology might benefit and transform settlement services for assets like securities or foreign exchange. The Bank of Canada has also developed a partnership with the Creative Destruction Lab, helped co-found the Blockchain Research Institute, and worked with the Bank of International Settlements to launch an innovation hub in Toronto. Having the central bank participate in fintech innovation helps Canada compete in developing and institutionalizing new financial technologies.

5) CBDCs have inherent risks, some of which can be addressed by design decisions. There are many design considerations that Canadians should be aware of and have public conversations about.

Privacy: CBDC transactions could easily be tracked in a centralized database because of the mechanics of how digital coins operate. While this could make anti-money laundering measures much easier, it could also invade personal privacy and deter widespread adoption. The specific design of Canada’s CBDC will need to balance safety and privacy.

Offline Transactions: There is a question of whether the CBDC should be useable when not connected to the internet. This would allow Canadians without regular internet to still use a digital Canadian dollar in their day-to-day transactions. For example, an offline payment feature could have made the July 2022 national outage of the Rogers network less disruptive. (Offline transactions during an outage could then be reconciled automatically once network connectivity is reestablished.) As Canada moves more of its critical systems online, a digital Canadian dollar could be an important tool to improve the country’s digital resiliency.

Programmable Currency: The Bank of Canada must also decide if and to what extent the digital Canadian dollar should be programmable. Programmable CBDCs could allow a government that issues cash transfers using a CBDC to restrict how or where these payments can be spent: for example, allowing payments for a grocery subsidy program only to be spent at grocery stores. Canadians should have a voice in deciding whether this is a desirable feature.

Final thoughts: It is important to consider the international perspective.

The Bank of Canada has been carrying out research on CBDCs since 2017 and has collaborated with the Bank of England, Bank of Japan, European Central Bank, United States Federal Reserve, Sveriges Riksbank (Sweden), the Swiss National Bank, and the Bank for International Settlements on developing foundational concepts and technical criteria for rolling out CBDCs. According to the Atlantic Council’s Central Bank Digital Currency Tracker, eleven countries have deployed digital currencies, and 114 are currently investigating their use. Of the G7 countries, only Japan is currently piloting a CBDC. Like Canada, the other G7 members are still exploring the issues and developing concepts.

The Bank of Canada has made it clear that it has not yet decided whether to issue a digital Canadian dollar. The benefits, risks, and public interest will continue to be discussed in the coming months and years.