July 29, 2021

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The study suggests Canada’s CBDC could foster digital innovation within the country

A study released by Canada’s central bank, Banque du Canada, found a number of favorable reasons why the country could benefit from its own central bank digital currency, or CBDC.

The document outlined two scenarios that could lead the bank to issue a CBDC at a future date. One would be if citizens no longer used cash extensively within the country for unspecified reasons. The other could be if a digital currency, public or private, is adopted so widely that it threatens the sovereignty of Canada’s current central currency.

Participants saw none of the scenarios as a likely outcome in the near future, but noted that interest in regulation and adoption of stablecoins within the country has increased in recent months. Even so, the study found that cryptocurrencies and stablecoins used as a means of payment in Canada are currently “new to a small number of enthusiasts.”

Related The Bank of Canada sees no valid reason for a digital dollar – for now

The paper recognized a number of potential benefits inherent in adopting a CBDC. That is, the technology could have the same level of security as cash while still allowing use in payment systems for online transactions and peer-to-peer transfers. Compared to payment options like credit or debit cards, a CBDC wouldn’t necessarily have the same type of transaction fees for retailers:

“A CBDC could be a simpler competition policy tool because it would provide a low-cost alternative payment tool for customers and merchants. This would help reduce interchange fees charged by established networks ”.

The fact that a CBDC could potentially support smart contracts was also a point of interest, as it could increase the speed and accuracy of execution by automating actions that are typically done manually. Participants felt that smart contracts would create some risks for users, as smart contract developers would likely be independent of the bank’s CBDC platform. This could be problematic if the execution of the contract does not meet the agreed terms, intentionally or not. They advised that smart contracts, as well as the programmability of a Canadian CBDC, would need to be studied further before deciding on implementation.

There could be many benefits to setting up a CBDC for Canada. The study explained:

“Overall, we argue that a CBDC could be useful and likely necessary to ensure a competitive and vibrant digital economy.”

Canada isn’t the only country looking to implement a CBDC. Speaking in the House of Representatives last week, Federal Reserve Chairman Jerome Powell said there would be no need for stablecoins or cryptocurrencies if there was a digital US dollar. A paper focusing on the benefits and risks of a digital dollar is expected to be released in September.

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