Digitalization is affecting every aspect of our society, including the economy, and how Canadians pay for things. A case in point is the increased use of digital payment solutions, such as Apple Pay, Google Pay, and e-Transfers, which has been further heightened by the global pandemic.
But is a world without cash possible?
For the Scotiabank Speakers Series in Digital Transformation in Banking on June 8 – this year in virtual format – Eric Santor, Advisor to the Governor on Digitalization, Bank of Canada, discussed digital currency from a central bank perspective. Santor leads the Bank’s digitalization work and research on the impact of digitalization. Ivey Dean Sharon Hodgson moderated a Q&A with Santor following his presentation.
We caught up with Santor to discuss the Bank of Canada’s work on Central Bank Digital Currency (CBDC). In the Q&A below, he discusses the potential benefits and challenges of implementing CBDC and the impact of COVID-19.
What have you learned from the Bank’s work on digital currency?
One of the Bank’s key objectives is to help ensure Canadians can use their preferred payment methods with confidence. As part of this mandate, we are exploring whether a CBDC is needed.
The world can change quickly and there are scenarios in which the Bank would consider issuing a CBDC. One scenario is if we reach a tipping point where cash could no longer be used for a sufficiently wide range of transactions. A second scenario is the widespread use of private digital currencies, such as one created by a big tech company – a monopoly that would erode competition and privacy and pose an unacceptable challenge to Canadian monetary sovereignty. In either case, there would be an argument for the Bank to step in.
While we are doing contingency planning for these scenarios, there is not a compelling case to issue a CBDC at this time. Canadians will continue to be well-served by the existing payment ecosystem, provided it is modernized and remains fit for purpose.
What are the potential benefits of a CBDC?
It depends on the circumstances under which it is implemented. It would have the same benefits as cash (medium of exchange, unit of account, and store of value), but in digital form. It would be safe, universally available, resilient, and offer privacy. It would also preserve competition in the financial system by providing a cheap and reliable alternative to credit and debit cards. A CBDC would help to maintain Canada’s monetary sovereignty.
What are the challenges related to CBDC implementation?
There are several challenges. How could it be integrated with other payment methods while still being resilient? What business model might work? Should the Bank develop it in-house, or with a private-sector partner? How would a CBDC work for cross-border transactions? And, perhaps most importantly, how could we ensure Canadians continue to transact privately for legitimate purposes, while guarding against illicit activities like money laundering, terrorist financing, and tax evasion?
We’ll also have to consider which design features might make a CBDC attractive as payment technologies and the financial system evolve. We need to design a CBDC that people would want to use, and are able to use, so we’ll be consulting broadly with Canadians.
How would CBDC implementation affect banking in general?
One of the main concerns is that it could compete with bank deposits, posing a challenge for banks’ business models and making bank runs more likely. In light of these concerns, a CBDC would be designed to limit its attractiveness as a competitor for bank deposits. It would resemble cash in its attributes and not earn interest. This would mitigate adverse financial stability consequences that might arise if banks needed to resort to more expensive and fragile forms of funding to replace funding from deposits.
Further research is needed to more fully understand the implications of a CBDC on the banking system, the effects of different CBDC designs and policies necessary to preserve the stability of bank deposits, and any other unintended consequences.
What is the impact of COVID-19?
In response to the pandemic, many businesses prefer digital payments over cash. We are doing some research on the payment methods used at points of sale during the pandemic. While the use of cash at point of sale may have decreased, the demand for bank notes has not changed. As long as cash remains popular, the Bank will continue to supply Canadians with bank notes. We are also asking retailers not to refuse cash, as some Canadians rely on it to access basic necessities. The risks from handling bank notes are no greater than those from touching other surfaces, such as handrails and doorknobs, as long as people wash their hands frequently as per public health recommendations.
Even if there was a more prominent shift toward a cashless society, the Bank would not automatically issue a CBDC. We continue to view it as a contingency and would only launch a CBDC if Canadians want it. This is a decision for Canadians and their government.
It is still early days and hard to know which changes in consumer and business behaviours will remain post-pandemic. One thing is for certain – online commerce will continue to grow rapidly and digital payment services will evolve to meet consumers’ needs. We will be watching these developments as we begin to recover from the pandemic.
The Scotiabank Speakers Series in Digital Transformation in Banking is an annual event organized by Ivey’s Scotiabank Digital Banking Lab. This year’s event was off the record and by invitation only.
