Huge Economic Impact Predicted if Canadian Central Bank Issues 'Digital Loonie'

Central Digital Currency Needed Only If Crypto Transactions Exceed Cash.

Canadian Finance Department officials believe that if the Bank of Canada ever created its own cryptocurrency, it would have a significant impact on the economy.

The Bank of Canada has been studying the idea of creating a digital currency for years, but it hasn't found a pressing need to do so just yet.

Officials in one briefing paper from last January stated that the introduction of a central bank digital currency would have "wide-reaching implications for the economy, the financial system", and the Bank of Canada's operations.

The documents indicate that the Bank of Canada held a number of discussions with federal authorities throughout 2020 to assess the ramifications of a "digital loonie" on various government departments and agencies.

Because the department claims that particular sections of the papers it provided to The Canadian Press under access-to-information legislation include sensitive government information, large portions of them have been blacked out.

However, what remains suggests that there were some federal concerns about a central bank digital currency, with departments asking to have a say before a decision is made.

The Bank of Canada has hastened its efforts to create a digital currency, following in the footsteps of counterparts throughout the world as the COVID-19 pandemic drives us toward a digital economy.

Only if the usage of actual cash for transactions plummets and one or more private cryptocurrencies like Bitcoin become widely used in Canada will the bank launch a digital currency.

Planned stablecoins whose value is less volatile have been getting more attention from the government and central bank, as the name implies. These currencies are backed by cash or government securities and are intended to be more stable than other cryptocurrencies.

Using private cryptocurrencies linked to the US dollar in Canada would put the Bank of Canada's ability to manage monetary policy in jeopardy, according to Jeremy Kronick, an associate director of research at the C.D. Howe Institute.

Kronick explained that the bank must entice private cryptocurrencies to utilize the Canadian dollar as a backing, since it is not currently doing so.

"The government could quash this thing in a second. The government could just say, 'forget it, you can't transact in Canada,"' said Kronick, the co-author of a paper about the merits of a Bank of Canada digital currency.

"I don't think they want to because there are benefits to the private cryptos that people like, but we want to also maintain that public good function. To do that, I think the (central bank digital currency) is the way to go."

The fluctuations in Bitcoin's value are also driven by the general public's perceptions of it. According to a recent study from the central bank, people's interest in Bitcoin is linked to how popular it becomes – the more individuals who adopt it, the more others will follow suit.

According to a recent study, Bitcoin adoption in Canada is low at around five percent. The authors think that because Bitcoin is easier for young people to acquire than to establish a formal bank account, they are more likely to use it.

The Bank of Canada does not have the legal authority from Parliament to provide a digital currency, only to develop, print, and hand out the bills contained in wallets.

The Finance Department has studied CBDC-related legislation, although one March email pointed out that no other countries had "deliberately amended legislation" to enable a CBDC.

The email went on to state that even in Sweden, which is widely regarded to be at the forefront of the CBDC movement among developed nations, the government expects a report on whether or not the central bank should have power to create a digital currency late next year.

Kronick believes that how quickly Canadian officials move will be determined by the speed with which important stablecoins are implemented. He mentioned Facebook's planned stablecoin in particular, noting that it would be simple for its users to adopt.

"I would like them to get ahead of it, but governments are notoriously slower-moving until they have to," Kronick concluded.

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