Perhaps 12 years ago no one would have thought that Bitcoin would become a major thing in the financial industry, let alone central bank digital currencies. Today we have a situation where a lot of countries are contemplating making their own digital currency, which will open boundaries for new innovations.
In addition, the coronavirus pandemic has accelerated the transition to cashless payment methods worldwide. Today, the world economy needs a tool by which users can make payments quickly, inexpensively, and without intermediaries. China, South Korea, Japan are testing their digital currencies.
The central banks of the leading countries have defined the key principles for the creation of digital currency. Only about 20% of the 66 largest central banks have announced plans to issue national digital currencies within the next six years. It seems that in the coming years, the state digital currencies will become widely available to ordinary citizens and will be able to contribute to the development of world finance.
Canada to also think of its CBDC
We should not miss Canada – the country, which is actively thinking about the creation of CBDC. We can remember that back in October 2020 the Bank of Canada was looking for an economist specializing in digital currencies and financial technology.
Canada’s financial regulator called the launch of CBDC a risky move for states. Nevertheless, the country is already working on the infrastructure necessary for the functioning of its own digital currency.
The Bank of Canada intends to involve the economist in its “large-scale” financial technology research project, a key part of which will be contingency planning for the CBDC.
In February 2020, Canada’s central bank said it would not release its own digital currency, but said it could change its mind if the use of cash is significantly reduced or private payment instruments such as the Libra digital currency, a Project initiated by Facebook, become widespread.
However, the bank continues to staff the CBDC program, which it says is of “great social importance.”
The economist’s work will include monitoring and analysis of developments in the field of electronic money and payments, including CBDC, cryptocurrencies, and crypto exchanges.
Why does Canada need a digital currency?
Given the acceleration of the digitalization of the economy against the backdrop of the pandemic, the digital Canadian dollar can become a new convenient additional means of calculation for both buyers and sellers, including in remote, sparsely populated, and hard-to-reach areas, where access to financial infrastructure is limited.
Another very important reason is entertainment and regulations associated with it. Online gambling in Canada is very heavily regulated. With fiat money it is practically impossible to start playing. The CBDC might open new opportunities for customers to play on reliable Canadian online casinos without additional commissions and being forced to sign up on shady websites. At the same time, it will help popularize this industry even more.
The CBDC will increase the coverage of the population with financial services, which will become more accessible, which will eventually improve the quality of life of people. Barrier tariffs and transfer limits under which some banks had set, will fade away.
In addition, the launch of the digital currency will stimulate innovation in retail payments, as well as in other areas, and will support the development of the digital economy. And reducing the dependence of users on individual providers will increase the stability of the country’s financial system.
The introduction of digital currency can minimize the chain of intermediaries in payments. That not only will they become cheaper, but will also make them faster, easier, and safer. Now, every time the buyer pays for the goods on a cashless card, to make a payment between him and the seller connect banks-intermediaries. They are responsible for processing and transmitting customer data. This is called acquiring, and for its provision banks expose sellers to the acquisition commissions. They, in turn, are directly dependent on the size of the interbank commission, which is set by payment systems. The dispute has been going on for a long time: business representatives ask the Central Bank to influence banks and reduce the acquisition commissions, banks defend their position.
At the same time, during the introduction of the digital Canadian dollar credit organizations may face increased volatility of balances in customers’ accounts and changes in the structure of balance sheets. After the introduction of the digital currency, funds will be distributed between cash, funds in bank accounts, and digital Canadian dollars in electronic wallets. For example, if a person fills an e-wallet in the digital currency of the Central Bank with money from a bank account, the bank’s assets and liabilities will be reduced at that moment. Because of this, the need for liquidity may also change.
What are national digital currencies and how they differ from known cryptocurrencies?
The growing popularity of cryptocurrencies and the desire to reduce cash flow have prompted many countries to consider issuing their own digital currencies. They differ from well-known cryptocurrencies in that they are created by central banks and recognized as legal tender.
National digital currencies will allow payments and payments to be made much faster, and most importantly – without commissions. This scheme completely excludes intermediaries who earn on commission fees. For many developed countries, CBDC can become an alternative means of payment, but the digital currencies of the figure-banks will be especially relevant for developing countries and third world countries, where a large proportion of the population still does not have a bank account.
The CBDC differs from cryptocurrencies in that they have to be provided with something – fiat currency or gold, which will make them not as volatile as popular cryptocurrencies.
Initially, it will be difficult for banks to predict the demand for the digital dollar, given that citizens and companies have not used it before. It is indeed a very innovative move and we have examples of other countries where the creation of digital currencies is in development. Canada is no exception even though there is some discussion regarding whether it will be a good move to adopt it as a currency.