The current boom in Bitcoin and other cryptocurrencies is bringing an emerging technology ever close to the financial mainstream. Governments around the world are looking closely at how cryptocurrency and blockchain technology could be incorporated into existing financial infrastructure.
A recent Canadian Central Bank white paper explores the feasibility and potential consequences of introducing Central Bank Digital Currency.
The white paper mentions the use of bank notes has declined in Canada over the past two decades relative to the country’s GDP. It mentions that in countries which are closer to becoming truly cashless, such as Sweden, central banks may soon be forced to take an active stance on whether to issue digital currency.
However, the paper notes that in Canada’s case, it would be undesirable for digital currency to completely replace banknotes. Canada is a large country with huge swathes of sparsely-populated land. A total switch to digital currency would be more feasible in countries with populations concentrated in large urban centers, such as most of Europe, along with East Asian countries like Japan and South Korea.
In Canada’s case, banknotes will still be necessary to conduct transactions in isolated rural areas with limited internet access. Interestingly, the paper envisions people in these areas using United States banknotes if Canada was to completely replace Canadian banknotes with digital currency.
The paper also shoots down a few of the proposed effects of a switch to digital currency. It concludes that digital currency is unlikely to affect the central bank’s ability to manipulate interest rates. It is also unlikely to be any more or less desirable for use in criminal activity than hard currency.
Concerns over enabling criminal activity would mean that digital currency would be unlikely to provide full anonymity. However, the paper dismisses the idea that digital currency would make it easier to track how money is being used and effectively cut off funding from criminal enterprises.
Another often-touted benefit of cryptocurrency is that allows those without bank accounts to easily store money and make transactions. This is could have a big effect in developing countries, but the paper mentions that very few people are excluded from the banking system in developed countries such as Canada.
The vision of digital currency outlined in the paper is one that blends the formula established by Bitcoin with parts of the existing banking system. Citizens would be able to store their digital currency in banks or withdraw it from ATMs and send it to smartphone-based wallets.
The biggest benefit of digital currency would be in its use as a form of everyday payment. Using digital currency would be cheaper than either bank cards or hard currency. This would lead to other knock-on benefits, such as reducing the barrier of cost for new firms and business ventures. The introduction of digital currency could therefore stimulate the economy by making it easier to start a business.
The paper concludes by recommending a cautious introduction of digital currency, followed by a period of learning through trial and error. As with all things in the emerging cryptocurrency space, the paper is unable to draw firm conclusions as to best practice as the idea of digital currency is completely untested.
Venezuela’s President recently announced the introduction of digital currency, but he was mocked by political opponents for providing no clear details on how this could be achieved. Venezuela is already at the forefront of cryptocurrency adoption, with hyperinflation making existing cryptocurrencies more attractive than the value-losing Venezuelan Bolivar.
It is likely we will see more governments experiment with digital currency over the next few years. The Canadian Central Bank’s white paper hasn’t provided a fully-fledged blueprint for a future digital currency, but it has provided another indication of the hugely disruptive potential of blockchain and distributed ledger technology.