Category Archives: Bank of Canada

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Bank of Canada Reinvigorates Case for Central Bank Digital Currencies

A paper released by the Bank of Canada has brought forth a positive argument for the implementation of central bank digital currencies (CBDCs).

Published on 26 July 2018, the paper written by the bank’s Senior Economist in the Funds Management and Banking Department, Mohammad R Davoodalhosseini, goes into great detail to emphasize the potential economic welfare gains that a CBDC could have for Canada and the United States.

Welfare benefits

Summarily, the economic researcher estimates that gains from the introduction of a CBDC “can lead to an increase of up to 0.64% in consumption for Canada and up to 1.6 per cent for the US, compared with their respective economies if only cash is used”.

Davoodalhosseini writes that many central banks are currently contemplating the concept; whilst they provide benefits including holding interest, CBDCs also beg the question as to how fiat cash and digital currencies can co-exist.

Through complex modelling, a quantitative approach and maths, the researcher makes compelling arguments for the use of a CBDC in the instance of welfare.

Should implementing digital currency prove to be cost effective he writes, “Having both cash and CBDC available to agents (consumers) sometimes results in lower welfare than in cases where only cash or only CBDC is available. This fact suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce CBDC is to improve monetary policy effectiveness.”

European findings

The European Parliament Committee on Economic and Monetary Affairs (ECON) released a study that suggested banks to consider establishing “permissioned cryptocurrency systems” to “complement or substitute” their respective fiat currencies.

The study writes, “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”

In the UK, a 2014 quarterly bulletin from the Bank of England concluded that digital currencies pose “no material risk” with regards to monetary or financial stability in the UK due to the small size of such operations at present. However, the paper describes the underlying technology of blockchain as beneficial in many regards, which is evident given its recent positive completion of a distributed ledger technology project.

CBDC use-cases

Countries around the world have been adopting national digital currencies in the most recent of years. Senegal in West Africa was one of the first to roll-out a digital currency. Announced in 2016, the blockchain based eCFA currency, which is dependent on the central banking system, is circulated alongside paper money and is helping unbanked Africans in the emerging market connect to financial services.

This year, Venezuela has utilized cryptocurrencies to extraordinary effect in the face of world-leading levels of hyperinflation and poverty. Through this success, the Venezuelan government announced a move to an oil-backed national cryptocurrency called Petro, which is presently being utilized to fund a huge housing project.

Though in a bizarre turn of events, the Venezuelan government announced recently that it would be getting rid of its fiat currency the Bolivar Fuerte and replacing it with a fiat currency that is tied to the Petro, the new fiat is to be named the Sovereign Bolivar.

The “economic reconversion” is to start on 20 August 2018, says Venezuelan President Nicolas Maduro.

 

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Canadian Draft Law Requires Crypto Exchanges to Report “Large Virtual Currency Transactions”

In Canada, an official draft of new regulations on crypto exchanges and payment processors has been released by the government, says a Canada Gazette reports.

The draft will tackle areas identified by a 2015-16 Financial Action Task Force (FATF) evaluation, principally strengthening Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime (AML/ATF). The FATF is an intergovernmental organization that develops policies to combat money laundering.

New regulations will treat crypto exchanges and payment processors as money service businesses (MSB), which requires them to report transactions over CAD 10,000 Canadian dollars (USD 7,700). The new Know Your Customer (KYC) procedures will now have a threshold set at CAD 1,000 CAD (USD 770).

Canada’s move towards further cryptocurrency regulation and transparency reflect the growing trend with governments around the world to tighten the regulatory grip on the industry as a whole. The US Securities and Exchanges Commission (SEC) has been particularly active this year in tracking down and prosecuting fraudulent cryptocurrency exchange activity, according to Bitcoin News.

Francis Pouliot, co-founder of Montreal-based blockchain consulting firm Catallaxy, was particularly unhappy with current developments, and tweeted his response to the latest draft.

New requirement: “Large Virtual Currency Transaction Record” means businesses required to ask for and keep details of every transaction over $10,000, like large-cash transaction reports. That’s going to be extremely difficult and invasive to implement. I will object to this. pic.twitter.com/PdabH0uGj4

— Francis Pouliot ⚡ (@francispouliot_) June 8, 2018

The draft reveals the regulations would cost about CAD 61 million (USD 47 million) over the next ten years, with the Canadian government maintaining that implementing these regulations will have a positive impact on the country’s international reputation.

This year, Canada’s first blockchain exchange-traded fund began trading on the Toronto Stock Exchange and the Bank of Canada piloted a research program to examine the possibility of a national cryptocurrency.

Canada has been referred to as one of the most transparent countries globally when it comes to understanding laws surrounding the digital currency industry, aside from Switzerland, which reportedly wants to be “THE crypto-nation”.

 

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A Step Back in History May Answer the Question, Is Fiat’s End in Sight?

Naeem Aslam, Contributor to Forbes has looked to history in an attempt to answer the question, will cryptocurrency ever replace fiat as the standard currency, reports Forbes.

At the recent Money 20/20 Conference held this month in Amsterdam, the panel discussions between major banks’ representatives were all of the opinions that wouldn’t be the case. During a panel discussion, representatives from Swiss National Bank, the Bank of Lithuania, the Bank of England, and the Bank of Canada took turns in expressing their views on the topic.

The responses were generally in agreement, with Bank of Canada’s James Chapman suggesting that this situation would only occur in a hyperinflation scenario, with Swiss National Bank’s Thomas Moser concurring that a poor fiat performance may well invite more cryptocurrency activity, but argued that “as long as central banks do a good job, there is no real for central banks to disappear”.

This discussion was the first of its kind where major financial institutions were able to address a specific question that is on many private and commercial investors’ minds. Aslam suggests that you only need to look into history to find the answer. He uses the UK pound established in 1694 and the US Dollar created in 1792 as cases in point, both currencies originally only available as precious metals, a troy pound of sterling silver constituting a pound,  and 24.75 grains of gold creating a US dollar.

Aslam observes that in the UK, the process of paper replacing gold was actually created by the private sector, with London goldsmiths furnishing receipts for payment, which of course later became the banknotes that are now traditional currency.

Across the Atlantic, The Massachusetts Bay Colony were the first to print paper money in the U.S. in 1690. As a type of IOU soldiers spent or traded them just like gold and silver coins. About 100 years later, the United States dollar became the country’s standard unit of money.

Due to reports of the decreasing trust in government, and specifically, banks after the last economic crisis, coupled with an increasing number of the population turning to alternative forms of electronic payment, such as cryptocurrencies like Bitcoin could be a portent for the future, especially when one looks at the evolution of cash.

Given the private sector was originally responsible for giving life to the current financial system, so it is possible that history is repeating itself with slow the encroachment on fiat by global cryptocurrency adoption, created by a private individual for global use.

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20/20 Central Bank Execs Forum Agrees Bitcoin No Threat Yet to Fiat

At Amsterdam’s Money 20/20 Conference on 5 June, bank representatives from four countries were asked to respond to the question “Can cryptocurrencies spell the end of fiat currencies?”, reports Cointelegraph.

During a panel discussion, representatives from Swiss National Bank, the Bank of Lithuania, the Bank of England, and the Bank of Canada took turns in expressing their views on the topic.

The responses were generally in agreement, with Bank of Canada’s James Chapman suggesting that this situation would only occur in a hyperinflation scenario, with Swiss National Bank’s  Thomas Moser concurring that a poor fiat performance may well invite more cryptocurrency activity, but argued that “as long as central banks do a good job, there is no real for central banks to disappear”.

Switzerland is now well known as a crypto hub, as reported in Bitcoin News recently, and has achieved widespread adoption across the alpine nation. Moser clarified this suggesting that so far it had been “well tolerated” due in part to the crypto haven tag and a balanced approach to initial coin offerings (ICOs) and had become an attractive fintech magnet for many companies.

Martin Etheridge, head of division at the Bank of England, somewhat hedged his bets expressing, “who knows what the future will hold”, although he did say that he saw little prospect of fiat being overtaken or replace by cryptocurrency:

“[But] I think the odds are stacked very much in favor of fiat currencies. I think it would take a pretty fundamental shift of public perception or the existing market system for it to happen.”

Dr Marius Jurgilis of the Bank of Lithuania clarified that a central bank-issued cryptocurrency and a cryptocurrency are not the same things, adding that the main product of a central bank is “a matter of trust”:

“…but if the society starts questioning, or it if it thinks that the things we are selling could be got in a cheaper, more convenient way, other things will appear.”

He added it was this level of trust that his country’s banks were guarding while admitting that the bank’s position was not totally entrenched. In mid-April, Lithuania’s central bank reportedly began looking into cryptocurrencies, round tabling points of view from all sectors, including regulators and investors.

 

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