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Bank of Canada Publishes Staff Paper on ‘Unmet Payment Needs and CBDCs

BoC Report | Aug 10, 2023

Digital money CBDCs - Bank of Canada Publishes Staff Paper on 'Unmet Payment Needs and CBDCs

The Bank of Canada's latest staff paper on CBDCs navigates the intriguing crossroads of modern payment needs and the potential dawn of a cashless society with a Central Bank Digital Currency

The document analyzes the potential role of a CBDC in a cashless society and highlights the challenges associated with its adoption and use. The findings suggest that while a CBDC could offer solutions to some payment challenges, its success would depend on its widespread adoption by consumers and merchants.

Summary of Findings

  • Background: titled "Unmet Payment Needs and a Central Bank Digital Currency" from the Bank of Canada, authored by Christopher S. Henry, Walter Engert, Alexandra Sutton-Lalani, Sebastian Hernandez, Darcey McVanel, and Kim P. Huynh, was last updated on August 10, 2023.  The paper discusses the payment habits of Canadians in the current payment environment and in a hypothetical cashless scenario.
  • Current Payment Habits: Most adult Canadians have access to a variety of payment methods, including cash, bank accounts, debit cards, and credit cards. This access would likely continue in a cashless environment (see Payment trends 2023). However, if merchants stopped accepting cash, some individuals could face challenges making payments.

See:  Can Canada go Cashless?

  • Adoption: For a CBDC to effectively address unmet payment needs, it would need to be widely adopted and used by the majority of consumers. This would encourage merchants to accept the CBDC, leading to further consumer adoption. However, since most consumers currently face few payment gaps, their incentive to adopt and use a CBDC might be limited. This suggests that introducing a CBDC to address the needs of a minority might be challenging.
    • Cash Dependent: Some individuals heavily rely on cash for payments and financial management. They might be underbanked, value privacy, or have other reasons for preferring cash.
    • Implications: The success of a CBDC in addressing unmet payment needs in a cashless society depends on its widespread adoption by the majority of consumers. If only a minority finds significant benefits from the CBDC, its widespread use and acceptance might be limited.
Image BoC staff paper payment methods by select user types in common situations - Bank of Canada Publishes Staff Paper on 'Unmet Payment Needs and CBDCs

Image BoC staff paper

See: CBDC Adoption in Africa and Caribbean is Slow. India Piloting CBDC Anyway

Other Implementation Considerations

  • Legal Status:  Before anything else, the CBDC must be recognized as legal tender in Canada. This ensures its universal acceptance for all debts, both public and private. The challenge lies in defining its legal status vis-à-vis other forms of money and ensuring its widespread acceptance.
  • Financial Stability and Sensible Monetary Policy: A CBDC would need to fit seamlessly into Canada's broader monetary policy framework. Policymakers would need to ensure that its introduction doesn't destabilize the financial system, especially by leading to bank disintermediation.
  • Privacy with Oversight: One of the significant advantages of digital currencies is transparency. However, this comes with privacy concerns. Regulations must strike a balance between individual privacy rights and the need for transactional transparency, especially concerning anti-money laundering and combating terrorism financing.
  • Interoperability: For the CBDC to be effective, it must be interoperable with existing payment systems and potentially other CBDCs or digital currencies. This poses technical challenges and requires ensuring seamless integration.  Worth noting that the IMF is working on a CBDC platform for global remittances.
  • Consumer Protection: With new technology comes new risks. Regulations must be in place to protect consumers from potential risks associated with CBDC use. This involves public education and robust security measures.
  • Role for Banks and Financial Institutions: Commercial banks and financial institutions play a pivotal role in the financial landscape and their role in the distribution and management of the CBDC must be clearly defined.
  • Navigating International Waters: Lastly, for the CBDC to be globally relevant, Canada must collaborate with international partners. This ensures the CBDC's use for cross-border transactions aligns with global standards.

See:  China’s CBDC: Offline Digital Yuan Payments via Super SIM Cards

In Conclusion

The introduction of a CBDC in Canada is a monumental task, requiring meticulous planning, stakeholder consultations, and iterative refinements. While the potential benefits are significant, the journey is long and filled with challenges. However, with a clear regulatory roadmap, Canada can position itself at the forefront of the digital currency revolution.

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