Bank of Canada Paper Considers Central Bank-Issued Cryptocurrency

Nishanth Shetty

December 1, 2017 9:54 am

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Cryptocurrency News

Central banks might get the advantage by issuing cryptographic versions of the fiat currencies, but the advantages would depending on whether they did so in an advanced developing economy.

 

At least that’s according to Ben Fung from the Central Bank of Canada and Walter Engert from the Office of the Superintendent of Financial Institutions, both of whom published a paper this week regarding the discussion of pros and cons for Central Banks issuing the cryptocurrencies.

However, the paper got to end on the question appearing whether is it worth for such institutions to provide cash or central bank digital currency (CBDC), should such demand drop deep enough, since it traps the query to the idea that will require coming at the expense of cash use.

It reads:

“Is it sufficient for a central bank to supply only reserves to qualified financial institutions? Put differently, is a ‘cashless society’ a sound outcome?”

 

The paper goes on to extend the six different advantages to a central bank for issuing a digital currency, but largely dismisses all but three: payments for the consumers, financial inclusion, and stability.

For customer payments, the authors write that a “CBDC will facilitate transactions that are currently foregone because of frictions that inhibit some types of transactions.” In particular, it reduces conflicts to online payments and tempting small traders to provide services on the Internet. In some economies, consumers see advantages in reducing costs for retail payments.

 

He wrote:

“Financial inclusion does not have a strong motivation for CBDs in advanced economies, including Canada.”

Finally, paper offers mixed results for improved financial stability.

On the one hand, the authors wrote:

“The financial systems in Canada and other countries feature highly levered banks conducting liquidity and maturity transformation and operating at the core of the payment system, it is well known that under some conditions this set-up can be unstable, and in severe cases the stock of inside money can contract, with adverse negative externalities for the economy.”

 

Digital money often offers a risk-free way to store customers without exposure to that risk. On the other hand, the ease of leaving bank deposits for Fiat Crypto increases economic turmoil.

The paper represents its writers’ opinions and reflects the need for Canada’s central bank.

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