Canada Considers its Own Digital Currency

There has been much talk about digital currencies being the way of the future. For governments, this technology both shows promise and composes a threat. This is because while cryptocurrencies have multiple uses, they can also harm banks. This is because using a cryptocurrency without an intermediary puts banks (and the country’s currency) out of business. It also takes away some of the control national banks have. This thinking has been one of the motivations for advances towards a cashless society. In turn, the cashless society would stem from countries creating their own digital currency. These initiatives are already evident in Sweden, the United States, and China. This means to stay in the game, “digital currency Canada” will be necessary to keep up with impending changes.

To ease Canadians into this idea, the Bank of Canada shared their plan for introducing digital currency Canada. This means both the digital currency would exist in addition to the colorful bills and loonies we know and love. The hope is that people would get comfortable with digital currencies. Afterward, the government will phase our physical money completely. But how exactly will this play out?

The Need for Digital Currency Canada

Canadians have continued to become more and more used to electronic payments. This means the concept of wealth being stored in digital assets is a likely reality. In The Road to Digital Money, the Bank of Canada shares that cash is only used in 1 in 3 transactions. We see this trend continue to increase as more people take up online shopping.

Events like pollution or worldwide epidemics like COVID-19 are likely driving the thought behind paper money becoming completely obsolete. Especially as governments in Argentina, Pakistan, and Peru are finding direct financial transfers to be more effective in providing relief. This concept can easily be uptaken by CBDC’s to send direct payments more rapidly than through checks or tax refunds. Cash being restricted is only the first of two potential scenarios that will result in digital currency for Canada.

The second being digital currencies like Libra becoming increasingly more popular in the general population. Central banks like the Bank of Canada are not in favor of any situation where they might lose the ability to monitor payments or regulate markets.

People racing symbolizing the race for countries like Canada to create their own digital currency.

Taking the Lead

Furthermore, every nation holds a lot of power when other countries desire their currency. Currently, certain countries continue to hold dominant positions in worldwide money circulation. This will quickly change when the first country adopts a digital currency for itself. Similar to a digital network like Facebook, being first could end up proving that nation’s currency to be a dominant player. As overseas customers adopt this currency, it could very easily overtake the global economy. Therefore, being first in this digital currency race might just be an event Canada sees as “worth running”.

Canadian Regulations on Cryptocurrencies

The Canadian government still remains apprehensive about cryptocurrencies. As a result, Canada doesn’t view crypto as a legal tender. For a tender to be legal, it must be issued by the Royal Canadian Mint. This also means the currency complies with the Royal Canadian Mint act. We might not be able to solely use bitcoin for our purchases just yet. However, the government of Canada hasn’t tested Digital Depository Receipts (DDR) in a project known as the Jasper project. The four phases of this project have enabled the government to recognize the power of the blockchain. As a result, different departments have tried to further utilize this technology in different departments.

The Canadian government continues to caution against some of the risks of using digital currency. This includes the Canada Deposit Insurance Corporation. The CDIC only covers eligible deposits in Canadian dollars at member financial institutions if the institution fails. This means in the current case of digital tenders, funds will remain unprotected in the case of bankruptcy. 

Currently, the CRA treats cryptocurrencies as a commodity. This is in alignment with the Income Tax Act. The income earned from cryptocurrency transactions is treated as business income. Or as a capital gain. If this stands true, this means any losses will be treated as capital losses. Furthermore, when you exchange cryptocurrency for a product it is viewed as a barter transaction. This means the CRA views this as an exchange rather than a purchase. This exchange occurs when two parties swap goods or services without using the legal currency.

Differences Between a CBDC and Cryptocurrency

In the event of an issuance of a central bank digital currency (CBDC), there would be some key differences between it and a cryptocurrency. First, unlike cryptocurrencies, a CBDC is not decentralized. This is because the government acts as the centralized authority issuing the currency. In Canada, central banks continue to state that digital currency isn’t necessary right now. However, if the public decides to continue using a private digital currency, the Bank of Canada will reconsider.

So what would this look like in action?

A Central Bank Digital Currency in Canada

Additionally, enabling a digital currency in Canada would ensure that Canada’s monetary sovereignty would remain unthreatened. This is because having a private digital currency like bitcoin became the dominant currency. Therefore, household spending power is now dependent on the value of the digital currency unit. The Bank of Canada does not influence its value. To avoid the issues that might arise, the Bank of Canada will see private digital currencies as a catalyst for implementing a CBDC. 

For the CBDC to be successful, the Bank of Canada must still continue to deliver on the same core functionality it is now. According to the Bank of Canada website, this includes “conducting monetary policy to deliver low, stable and predictable inflation, promoting the stability and efficiency of the Canadian financial system, providing banknotes that Canadians can use with confidence and providing fiscal-agent services to the Government of Canada”.

The other core component that must be considered is a balance between anonymity and disclosure of certain kinds of information. 

Image of border symbolizing cross-border payment experiment when canada considers its own digital currency.

Bank of Canada and Singapore Cross-Border Payment Experiment

Central banks have already seen success using CBDC’s. This was evident in May of 2019 in an experiment done in Singapore. This was the first trial between two central banks. To do so, the experimental payment networks for each country were linked together. More specifically, Project Jasper and Project Ubin. This experiment further proves that there is a potential to increase efficiencies and reduce risks for cross-border payments.

The project was executed by using the Hashed Time-Locked Contracts (HTLC). This is a class of payments that use hashlocks and timelocks to require that the receiver of payment either acknowledge receiving the payment prior to a deadline by generating cryptographic proof of payment or forfeit the ability to claim the payment, returning it to the payer. The countries were able to connect these networks and allow for a Payment versus Payment (PvP) settlement to occur without a third-party intermediary.

The findings of this experiment suggest that research can continue to be done in DLT connectivity. This will create more opportunities for collaboration among central banks, financial institutions, and FinTechs. Additionally, it will continue to make international payments and get used to the idea of digital currency transactions on a national and global scale.

Post-Covid Benefits of a Digital Currency

In light of the COVID-19 pandemic, it has become more and more apparent that cryptocurrency can keep you healthy. As we touched on in a previous article, money itself is pretty dirty with it passing between so many people without washes. This means using a digital currency might actually reduce the transmission of diseases spread on infectious diseases. Even worse physical money often holds trace amounts of illegal drugs such as cocaine. As a result, you might’ve noticed many stores stop taking cash in the form of digital payments already to reduce germs. This trend will continue to lead a charge to a cleaner tomorrow. 

Additionally, with more people using Canada’s currency means the Bank of Canada will have even more data about what citizens are choosing to spend on. While this sounds scary, it can also be a benefit when this information can be shared with the police or other government authorities. The hope is that less fishy business will occur as a result. 

The Canadian government continues to look at the dozens of benefits associated with implementing a digital currency. This includes allowing citizens to pay interest on balances and providing the government with a greater opportunity to collect information on Canadians. In turn, the government could continue to produce offerings that appeal to Canadian citizens. This is not without any downsides. That is, the lack of physical currency will become a risk to stable funds for bank deposits.

Image of person buying stuff with digital payment methods such as if Canada adopts a digital currency.

How Soon Can We See Digital Currency Canada?

The Bank of Canada currently doesn’t see a compelling case for introducing a digital currency. As the sole issuer of legal tender banknotes in the country since 1944, they continue to only act in favor of maintaining a safe and sound financial system in Canada. Since the current financial system is in fact serving Canadians well, there is no need to abandon the system. That said, modernizing payment systems to maintain user confidence is still expected of the Bank of Canada. If this means implementing a digital currency, the bank will be ready to bring it to life.

But before we see this concept come to life, the Bank of Canada still has a couple of steps to go through before issuing this digital offering. These steps include determining the underlying technology. This might sound like an easy choice. However, six-plus years of research have already been made by the Bank of Canada into researching the economic and technological impacts of the growth of volatile digital currencies like Bitcoin.

Once this decision has been made, The Bank of Canada will still need to get legal authority from parliament to create this currency. Even if this happens, Canadian citizens and their elected representatives will still have to vote in favor of the digital currency. A pilot test project will follow, which can last up to two years. After this period of time, people may still decide they are uncomfortable with using a digital currency, forcing the government to make adjustments and potentially reconsider. This means although the thought of digital currency continues to bring excitement it might still be a few years off.

Challenges for Canada’s CBDC

Making the transition to a central bank digital currency will also provide some unique challenges. One of these is that the population at large might decide to move their savings to the central bank rather than their traditional bank account since they have more trust in its institution. This would mean traditional banks could go out of business, displacing many people from their jobs. The complete transition to a digital currency may result in the permanent loss of these jobs altogether.

Another concern that we should be aware of is the increase of a run on the banking system. As people rush to withdraw their savings from their bank, banks will be unable to keep up since they don’t have enough reserves on hand. This could result in a system-wide run that makes the financial system even less stable than it currently is.

The Future of Digital Currency Canada

While there are many potential benefits to Canada taking on digital currency, that isn’t to say a cashless society is without hidden dangers. Although a digital currency might still be a few years away it is important to consider both sides of the coin (pun intended) now. Doing so will help you to understand the implications of what a change like this could mean for you.

We agree it can be hard to say for certain what the future will hold. However, the idea of Canada’s own digital currency is still a very reasonable possibility that we should consider. To get comfortable with this concept and the use of digital currencies today, Hedgetrade can be a great place to get started. All it takes is going to!