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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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