Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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BoC Research on Digital Dollar’s Impact on Economy
Research | Jul 26, 2024
Image: CBDC and Transmission of Monetary Policy (BoC Jul 2024)
Bank of Canada study shows how a Central Bank Digital Currency (CBDC) could amplify or shrink economic shocks based on design and implementation choices
Although there has been much discussion about how digital currencies might affect monetary policy, the Bank of Canada's latest staff working paper, "Central Bank Digital Currency and Transmission of Monetary Policy", looks in detail how a digital dollar might specifically increase or decrease traditional monetary policy shocks. In short, the impact of monetary policy can be significantly altered by the design and implementation of a CBDC, including whether or not it is interest-bearing and to what extent it can be substituted for bank deposits.
Highlights
- If a CBDC is closely substituted for traditional bank deposits, any monetary shocks will affect consumption and investment by 5-10%.
- CBDCs that earn interest will signficantly influence liquidity preference and spending behaviour.
- A fixed-interest CDBC is more sensitive to policy rate changes by 20%.
- Critical to manage the quantity of CBDC reserves. Controlling the quantity of CBDCs instead of their interest rates can reduce policy shocks and economic downturns by 10-15%.
Other recent BoC reports
July 3, 2024 - An update on the Digital Canadian Dollar program. Advises for a safe and inclusive CBDC design and includes stakeholder discussions and implementation technologies. Read more: BoC Update on The Digital Canadian Dollar Initiative
February 20, 2024 - Impact of a potential CBDC on Canadian banking choices. The report looks at how CBDCs would influence consumer behaviour and competition in the financial sector. Read more: CBDCs in Canada and Impact Drivers on Banking Choices
January 26, 2024 - CBDC's role in financial stability and government-backed digital payment options. Read more: Bank of Canada’s Latest on CBDC Implementation
October 4, 2023 - CBDCs and financial inclusion (addressing current financial inequities) along with the declining use of cash. Read more: BoC: Redefining Financial Inclusion for CBDCs
August 10, 2023 - CBDCs could improve financial inclusion and help serve underserved groups with secure digital payment options. Read more: Bank of Canada Publishes Staff Paper on ‘Unmet Payment Needs and CBDCs
April 12, 2022 - The Bank for International Settlements and the Bank of Canada partner to launch the BIS Toronto Innovation Centre to explore fintech innovations including CBDCs. Read more: BIS and Bank of Canada Launch BIS Toronto Innovation Centre
March 16, 2022 - The Bank of Canada and MIT collaborate on a research project to study advanced digital currency technologies and economic impacts CBDCs. Read more: BoC and MIT announce joint CBDC collaboration
Outlook
While the likelihood of a CBDC in Canada is still years away, studying design and options to reduce risks is an important exercise along with the general education and research to remain competitive. For fintechs and financial institutions, it's important to stay informed and remain adaptable.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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