Bank of Canada developing CBDC ‘contingency plan’

The Bank of Canada is making digital currency contingency plans for a scenario in which private sector alternatives become dominant as a means of payment, deputy governor Timothy Lane said in February 25 speech.  

Lane said that while there is no “compelling case” to issue a central bank digital currency (CBDC) at this time, “we need to move forward to work out what a potential CBDC might look like and how it could be managed”.

Providing an alternative with “no commercial motive” is important, he said, citing a recent survey that found the public lacked confidence in technology firms.

The survey, conducted by the Official Monetary and Financial Institutions Forum in 13 advanced and emerging economies, found that more than half of the respondents said they would prefer a digital currency to be issued by their central bank. Internet technology firms ranked lowest.

Facebook’s proposed libra stablecoin is one example of a private-led initiative that could disrupt the payments landscape. “It’s tough to predict if libra will ever live up to its promises, or even come into existence,” Lane said. “But it is a good example of a transformative technology that affects how the bank needs to respond to the future of money.”

Another scenario that would prompt the central bank to issue its own digital currency would be a significant drop in the use of cash. This would raise concerns over the central bank’s ability to support public-issued means of payments, he said.

A 2017 survey conducted by the bank found that one in 10 Canadians claimed to be entirely ‘cashless’. Respondents that do use cash have also reduced how frequently they use it, from more than half of transactions a decade ago to about one-third in 2017, the survey shows.

Contingency plans

Like a growing number of other central banks, the Bank of Canada is preparing the groundwork for a CBDC issuance by exploring the implications of different business models, Lane said.

The central bank hopes to answer questions including: how could it integrate with other payments systems? Who would take charge of developing the currency? And how would it work for cross-border transactions?

“But a CBDC could only be launched successfully if Canadians want it,” Lane said. “So we will be consulting with governments and key stakeholders in provinces and territories across Canada.”

The Bank of Canada is involved in a working group led by Benoît Cœuré, Bank for international Settlements innovation hub chief, and Bank of England deputy governor, Jon Cunliffe. Members of the group also include the Bank of Japan, European Central Bank, Sveriges Riksbank and Swiss National Bank.

Lane also discussed other areas the central bank has been working on to adapt to the quickly evolving payments environment. These include supporting Payments Canada in developing a new real-time payments system and developing a new “retail payments oversight framework” to “beef up” payment system providers’ risk management practices.