Bank of Canada accelerates development of ‘digital loonie’

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A decline in the use of cash and the boom of e-commerce during the COVID-19 pandemic has prompted the Bank of Canada to speed up its development of a “digital loonie,” even as the decision to issue such a currency remains up in the air.

The central bank has been exploring the idea for several years in response to a decline in cash transactions and the emergence of private-sector digital currencies such as bitcoin and Diem (the latter, formerly called Libra, is a proposed electronic currency backed by Facebook and other large technology companies).

Interest in bitcoin is largely a “speculative mania” that is likely to have little impact on the money system, Bank of Canada deputy governor Timothy Lane said in a speech on Wednesday. But other forces are rapidly transforming the nature of money and the pandemic has accelerated the digitalization of the economy.

“We’ve been watching for a tipping point where not only people are choosing to use less cash, but merchants are, on a sustained basis, not accepting it because it’s just not worth the cost and bother,” Mr. Lane said in an interview with The Globe and Mail on Wednesday, after his speech.

He pointed to a recent Statistics Canada survey of retailers showing e-commerce has almost doubled from prepandemic levels, as well as data from Interac showing the volume of contactless or tap transactions grew by two-thirds from April to July last year.

“It’s too early to tell to what extent that’s going to persist after the pandemic is over, but you certainly could see a situation where habits change, and where people have already built in a greater reliance on digital [payment] methods,” Mr. Lane said.

A cashless economy may still be a long way off, and Mr. Lane repeated in his Wednesday speech that a “digital currency is by no means a foregone conclusion” at the central bank. That said, the bank’s work on digital cash is accelerating, and it has hired cryptographers and teamed up with universities to start developing the system for “contingency” purposes.

Central bank-backed digital currencies (CBDC) would differ from other electronic money, such as bank deposits, in that they would be direct claims on central banks, similar to banknotes. The idea is to provide a public form of electronic money that would theoretically be more secure, more private and cheaper to use than private sector alternatives such as debit and credit cards.

The Bank of Canada began looking into digital currencies in 2013, and it has conducted several experiments with blockchain-inspired distributed ledger technology to see if it can settle payments between banks or be used for cross-border transactions. The more recent push toward a digital cash system is being driven by a shift in retail payment technology.

E-commerce is thriving and digital wallets, tap payments and QR codes are changing how people make in-person payments. Meanwhile, technology companies such as Apple and Google are increasingly entering the payments space and could begin competing with banks.

Private-sector “stablecoins,” such as the Facebook-backed Diem, are still under development, but the prospect of big technology companies controlling currencies has already raised concerns among regulators around the world.

To date, much of the discussion around digital currencies has revolved around bitcoin and similar cryptocurrencies. Just this week Tesla chief executive Elon Musk sent prices of bitcoin skyrocketing when he announced that Tesla had invested US$1.5-billion in bitcoin and would accept it as payment for cars.

Mr. Lane took a dim view of the Tesla announcement, and of bitcoin in general, noting that the wild price fluctuations of cryptocurrencies and high transaction costs make them ill-suited to be means of payment.

“Tesla is still pricing its cars in national currencies, in Canadian dollars, U.S. dollars, whatever. And for them obviously, it’s not really that they’re planning to pay their workers in bitcoin,” Mr. Lane said.

“You get paid your wages one day, and it could be they’re worth half as much or 30 per cent the next morning, or they could be worth double. I mean this is a total gamble. Nobody wants to live like that,” he added.

Central bank-backed digital currencies may draw on innovations from the world of cryptocurrencies around cryptography and distributed ledger technology. But they will be fundamentally different, not least in regards to privacy.

Bitcoin allows users to make payment anonymously. In any central bank-backed currency system, regulators would need to able to track payments to detect money laundering or tax evasion.

“It could be something that conceptually could be like a two-key system, where we don’t have the personal information, a payment service providing company doesn’t have the payment information,” Mr. Lane said. “There may be certain circumstances, kind of like when the police have a search warrant and they can come and look in your freezer and see if you’ve got some cash in there ... where authorities with proper authorization could have access.”

Canada is far from the only country looking CBDCs. A recent survey of central banks conducted by the Bank of International Settlements found 86 per cent of respondents are conducting some form of research into launching their own central bank digital currencies.

In October, the Bahamas became the first country to issue a form of digital cash, called the “Sand Dollar,” and central banks in China and Sweden have launched digital currency pilot projects.

The prospect of other countries developing CBDCs before Canada has caused some concern that Canadians could flock to those digital currencies, undermining the domestic currency.

“If we started to see a large share of the Canadian economy being dominated by transactions in another currency, then of course that would pose major issues for Canada,” Mr. Lane said. But he added that it’s not a concern that is “immediately on the horizon.”

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