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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Bank of Canada’s Latest on CBDC Implementation
Policy | Jul 17, 2024
Image: The Role of Public Money in the Digital Age (BoC, July 2024)
Bank of Canada Sees CBDCs as Essential for Financial Stability and Inclusion in the Digital Age
The Bank of Canada has released another paper on Central Bank Digital Currencies (CBDCs), called "The Role of Public Money in the Digital Age" (25 page PDF). This paper articulates staff's latest views which is a cautiously positive stance on the potential implementation of a CBDC. For those that have missed some of the previously published BoC reports on CBDCs, check out NCFA's fintech industry reports and research directory for more reading.
BoC's Position on CBDCs
In order to maintain the stability and effectiveness of the financial system in the digital era, the Bank of Canada believes that CBDCs may be essential for the financial system as it relates to the evolution of public money. They think a CBDC would serve as a secure, government-backed substitute for the many, proliferating stablecoins and private digital currencies. Bluntly put, virtual currencies may pose a danger to the Canadian dollar, so a CBDC may be required to preserve monetary sovereignty. The Bank of Canada would have more regulatory authority over the monetary system and be able to better manage economic policies and ensure compliance with financial rules if it were to issue a CBDC.
See: 2023 BIS Survey: CBDC and Crypto Trends Revealed
The report focuses on how a CBDC could improve marginalized people's access to financial services. The Bank of Canada recognizes the significant barriers that Indigenous and rural communities may have when trying to access typical financial services. By offering a safe and convenient digital payment option, a CBDC might lessen the need for cash and close the gap in financial inclusion. Families and individuals with low incomes may turn to pricey alternatives like payday loans and check-cashing services because they frequently struggle to obtain reasonable banking services. A CBDC may provide an inexpensive, widely available mode of payment that can help relieve the burden and financial strain.
Coordinating CBDC implementation with educational programs may increase digital and financial literacy. This plan will enable all Canadians, regardless of socioeconomic status, to benefit from a CBDC and utilize digital financial services effectively, which would lead to increased economic participation.
In order to accommodate people with different degrees of digital competency, the BoC's research highlights the need to develop a CBDC with user-friendly features and interface and strong customer service. It also emphasizes the importance of providing accessibility for individuals with disabilities to guarantee that a CBDC is open to and usable by every user.
Better security features than traditional currency can be provided by a well-designed CBDC, shielding users from fraud and theft. This is especially advantageous for vulnerable groups that are more likely to become victims of financial crimes. In order to maintain user confidence and prevent transaction data from being misused, the Bank of Canada places a high priority on incorporating robust security and privacy measures into the design of the CBDC. This improves overall system security and dependability.
See: The Ripple Effect of CBDCs on Bank Lending and Profitability
All things considered, the Bank of Canada is exercising caution to ensure that any development pertaining to the CBDC is advantageous to both the financial sector and the broader public. They propose a well-rounded approach to innovation that makes use of new technology to boost the economy of Canada's inclusivity and productivity while safeguarding it against emerging threats.
A Few Global CBDC Updates
- The European Central Bank (ECB) has entered a 'preparation phase' for a digital Euro, with an emphasis on basic elements like platform development, thorough testing, and rules finalization. In keeping with Canada's emphasis on efficiency and privacy, this phase is intended to guarantee high levels of anonymity and instantaneous settlements in central bank currency.
- The CBDC development process is guided by the IMF's 5P methodology, which specifies a methodical approach that includes preparation, proof-of-concept, prototypes, pilots, and production. This methodology, like Canada's cautious yet proactive strategy (IMF), is about deliberate and phased adoption.
- For cross-border transactions, interoperability in CBDCs is emphasized by both Swift and the Atlantic Council. Swift's interlinking approach addresses any fragmentation issues by showing how various networks can be connected to streamline and expedite financial transactions utilizing CBDCs. See: IMF Working on Global CBDC Platform to Revolutionize Global Remittances and Trade
See: SWIFT Launching CBDC Solution Within 2 Years (to Compete with BRICS)
- Financial Inclusion: The IMF and other central banks, along with Canada, acknowledge that CBDCs have the potential to advance financial inclusion. The IMF talks about how well-crafted CBDCs can mimic the qualities of cash in order to be accepted by those that are financially excluded and improve access to the formal financial system.
- Central banks globally are navigating tech and regulatory obstacles that CBDCs present. The emphasis is on building strong frameworks that guarantee security, compliance, and user protection.
How About the U.S. Perspective on CBDCs?
The United States remains cautious about the widespread adoption of CBDCs, citing several concerns. Due in large part to worries about financial stability, privacy, and regulatory obstacles, the US is still hesitant to embrace CBDCs widely. Significant privacy concerns are raised by critics who claim that a CBDC might enable unprecedented government surveillance by allowing for the comprehensive tracking of individual financial transactions. Officials in the United States are also concerned that a CBDC may cause widespread withdrawals from bank deposits, upending the banking industry and perhaps resulting in disintermediation and financial instability.
In addition, there are significant technical and regulatory obstacles to take into account, such as the need for a comprehensive regulatory structure to tackle concerns pertaining to cybersecurity and system resilience. It is also the belief of policymakers that current payment systems can be enhanced without requiring a CBDC.
See: Markets React to Trump’s Assassination Attempt
The cautious stance taken by the Federal Reserve, which states that comprehensive public engagement and parliamentary support are required before issuing a CBDC, is indicative of a wider political and economic reluctance to proceed without careful consideration.
Conclusion
With several nations moving forward with their CBDC projects, global trends are constantly changing. Canada is taking a cautious approach to guarantee that it is ready to adapt to new financial landscapes while preserving its monetary sovereignty.
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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