In his final year-end speech, retiring Governor Stephen S. Poloz noted that the 2020 agenda for the Bank of Canada will include coming to grips with the impact of digital technology. This will include considerations of digital currency. While not a goal of the Bank of Canada, and perhaps not even supported from a policy point of view, the Governor indicated that the institution needs to be prepared for such an innovation should it proliferate globally. Referencing central bank money as a public good, the speech notes that private digital currencies cannot replace the ability of such a public good to render an individual’s payments in universally accepted and final form. The suggestion seems to be that if central bank digital currencies achieve significantly greater acceptance, the Bank of Canada may need to be prepared to reflect that in its currency offerings.
Digital currency is simply (or perhaps not so simply) currency held in a digital representation but which remains the same as sovereign currency in paper (or polymer) bill form. This differs from virtual or crypto currencies which are alternatives to money. Digital currency might be exchanged using electronic transfers or by cards. A significant portion of the funds in our money supply is already effectively maintained electronically in accounts. A digital currency changes the physical methods by which currency can be exchanged by individuals and businesses.
Although the Governor’s speech expresses hesitancy in the need to head down this road, it is nonetheless clearly on the Bank’s agenda as an item for significant exploration. And while most Canadians would probably be surprised to know that this is under consideration, Bank of Canada materials show that Governor Poloz’ comments were not a new item to the Bank of Canada. In April 2019, the Bank of Canada published an article entitled “The Road to Digital Money”. This article reviewed how digital currencies could work and suggested that provision of digital currency would result in more consumer choice. Acting like current electronic payment methods, digital currency wouldn’t be tied to a consumer’s commercial bank. The article identified certain challenges that digital currency could create. These included challenges to banks. For example, if currency is stored digitally rather than in a bank account, this might reduce the amount of money available for lending, potentially increasing lending rates. In addition, the ability to track transactions, which is sometimes of importance to banks and lenders, could be lost with digital currency. The ability to hold currency electronically also might increase the risk of a bank run, according to the article, as customers would have the ability to easily hold larger volumes currency and to obtain it from banks quickly.
On a macroeconomic level, a 2018 Bank of Canada staff working paper considered a central bank digital currency and monetary policy. The paper concluded that a central bank digital currency would have a non-trivial effect on the banking system. Potentially a safer medium than bank accounts due to its engagement with the central bank, the digital currency could become a competitor for bank accounts. This might lead to greater bank competition with better and cheaper products being offered. Alternatively, such competition might lead banks to riskier projects in order to maintain their returns and to increase their interest rates, affecting the real economy. No major economies have issued a digital currency yet, and accordingly real world effects on lenders and bank practices cannot be assessed.
The 2018 paper and the 2019 article are but two of the considerations that the Bank of Canada has already given to digital currencies. There are many others available on the Bank of Canada website. Examination of the circumstances appropriate to issuing a digital currency appeared in the Bank’s 2018 Annual Report. Both the 2017 and 2016 Annual Reports contained minor references to research on digital currency. It is apparent that the Bank of Canada’s focus on this potential innovation is increasing and becoming more in depth. In late January the Bank of Canada announced it would join with the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank, the Swiss National Bank and the Bank for International Settlements in considering potential cases and choices with respect to digital currency. Cross border interoperability and emerging technology knowledge will be shared.
Lenders and banks will need to pay attention to both the Bank of Canada’s intentions in this area and consider the potential effects of them.