On August 10, 2023, the Bank of Canada published Staff Discussion Paper 2023-15 titled “Unmet Payment Needs and a Central Bank Digital Currency” (the “Discussion Paper”).  The Discussion Paper addressed whether a digital loonie would “address unmet payment needs in a cashless society”.  While Staff discussion papers are not official Bank of Canada views, they may influence central bank policy.

The Discussion Paper concluded that most Canadian adults had little pressing need for a Canadian digital currency given that they have a range of payment options.  These payment options include cash, bank accounts and debt and credit cards.  The authors identified categories of Canadians that do not use certain payment methods due to “preferences or the constraints that they face”[1] such as: early adopters who are digital-only and do not use cash; the underbanked who rely almost exclusively on cash; the high-privacy adherents who do not want digital traces; and the technology averse who avoid digital payments.[2]

The authors identified the following features of a hypothetical CBDC[3]:

  • Universal accessibility (easy to use)
  • Non-interest bearing
  • Limited transaction costs (for the consumer)
  • A high level of privacy but not anonymity[4]
  • Capacity for offline transaction

The Discussion Paper theorizes that adoption of a digital loonie could follow the “S-curve” pattern, with early adopters jumping in first and widespread adoption following due to reinforcing network effects.[5]   However, the authors expressed skepticism that CBDC adoption would ever reach the critical threshold because the mass of consumers needed to drive use “have the weakest incentives” to adopt the digital loonie.[6]  Without widespread consumer use, widespread merchant acceptance is also unlikely.  The authors speculated that a digital loonie could worsen participation in the economy if merchants no longer generally accepted cash.  Cash or offline methods of payment could be necessary as a fail-safe backup in case of a widespread network or power outage.[7]

In sum, the Discussion Paper counsels hesitancy against jumping on the CBDC bandwagon.  A digital loonie is not a panacea for financial inclusion and if a decision is made to roll out a CBDC, it will not be made by the Bank of Canada.  At the moment, the Bank of Canada (as influenced by its staff) sees little need for a digital loonie.[8]

[1] Discussion Paper at 1.

[2] Discussion Paper at Table 2: Methods of payment of select consumers in common environments.

[3] Discussion Paper at 3-4.

[4] The authors note that anonymity would not permit compliance with fraud, money laundering and terrorist financing regulations.  Discussion Paper at fn 10.

[5] Discussion Paper at Figure 1:  Illustrative S-curve for technology adoption (left) and for CBDC in a cashless environment

[6] Discussion Paper at 4.

[7] Discussion Paper at 3.  The authors refer to a network outage in “summer 2022”, likely the 2022 Rogers Communications outage that hit July 2022 and affected more than 12 million users across Canada.

[8] The authors suggest alternatives to a CBDC that would improve access to financial services.  Their recommendations include improved Internet access nationwide, availability of low-cost bank accounts and collaboration with banks to improve payment options in remote regions.  Discussion Paper at 8.

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