ThinkTWENTY20

By Eric E. Cohen, CPA

The ‘Lectic Loonie and High-tech Toonie. The Digital Dollar. Le huard numérique. These fanciful names, most of which I made up, sound like the latest dance craze, but are new digital counterparts to today’s currencies. Will Canada and the US embrace the hype around Central Bank Digital Currencies (monnaie numérique de banque centrale) – known as CBDC (or MNBC)? Is it possible to begin to consider how this might have an impact on the activities, responsibilities, risks and challenges the financial professional may need to face – and when?

The current stagnation of pricing around cryptocurrencies has muffled the shouting a wee bit: Bitcoin as of 10/24/2021 was going for approximately $61,000 US; as of 10/24/2022, around $19,000 US; the non-fungible token (NFT) craze has likewise quieted for the time being, down 60% from earlier in the year. Nevertheless, the acceptance of crypto-assets as an investment opportunity, if not a payment method, is seen as one of the primary catalysts for the world’s central banks to investigate creating digital versions of their country’s/regional currencies.

The emergence of crypto-assets is not the only contributor; crypto is not yet pervasive, as adoption is estimated in the 10-14% range. McKinsey^[1] notes that cash usage is dropping, central banks want to make sure they contribute to the strategic discussion of new payment methods, and there is some maneuvering over the role of each central bank in an increasing global payment environment. Will the race be won by the speedy, or by the careful?

The Bank of Canada has done significant research both on its own and in projects with other countries, such as the Monetary Authority of Singapore and the Bank of England. Bank of Canada^[2] notes that it is building the capabilities of issuing a digital version of the Canadian dollar, but doesn’t have immediate plans to do so.^[3]

The U.S. Federal Reserve has also done significant research work in the space, and delivered numerous background and technical documents. Under an Executive Order from the White House, the Fed issued in September 2022 a “Technical Evaluation for a U.S. Central Bank Digital Currency System.” The 58-page guide is rich in practical and technical considerations for a CDBC. Like the Bank of Canada, however, the Fed is very clear: it is not making “an assessment or recommendation about whether a U.S. CBDC system should be pursued.”

In this first blog about CBDCs, I am going to avoid any comparison with cryptocurrencies. The reason: in North America, there are simply too many open questions about how to implement a CBDC. What is generally agreed is

• A CBDC is a digital form of a country or region’s sovereign currency.
• A (retail) CBDC is a liability of the central bank broadly available to the public
• The primary purpose of a CDBC is to pay for/buy things, and is not meant to serve as an investment.

Although some regions may look for their CBDC to completely replace the traditional coins and currency, both the Canadian and US positions are for the CDBC to be optional, and for traditional currency to continue as long as it is being used, not being widely replaced by the CBDC or an alternative private digital currency.

So, I conclude this post by noting that CBDCs are not, first and foremost, a technology looking for a solution. They are a policy issue. They are a strategic issue. They are a political issue.

Implementation may have nothing to do with blockchain, nothing to do with cryptography, nothing to do with decentralization. Technology does not inherently overcome, reconcile or prioritize policy objectives, which may, in fact, be in tension with each other. Privacy and national security are in conflict with each other. Some countries will prioritize one over the other, based on their national needs and leaders.

The U.S. report lists as one of its objectives, “All should be able to use the CBDC system.” It notes, however, that while the “CBDC system may initially support fewer potential consumers and uses, it should scale and support a broader range of use cases over time.” My personal circles include people with no Internet access, no computer, no smartphone. If the system can’t be used with a flip phone and text messages, it isn’t going to reach people I know, and many others will be left out.

I will continue with more on what a CBDC means – to banking as we know it, to the impact on merchants, investors, consumers, to financial professionals who may see more technical adoption and solutions for CDBCs within enterprises than for crypt-assets as we know them today.

^[1] https://www.mckinsey.com/industries/financial-services/our-insights/central-bank-digital-currencies-an-active-role-for-commercial-banks.

^[2] https://www.bankofcanada.ca/research/digital-currencies-and-fintech/projects/.

^[3] https://www.bankofcanada.ca/research/digital-currencies-and-fintech/projects/central-bank-digital-currency/.