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The Bank of Canada is considering issuing digital dollars. Is this the future of money?

Currencies that exist only online could speed up transactions and encourage financial innovation. But we’re a long way from seeing the end of cash.

For the average person, cash may still be king, but a pretender to the throne is beginning to emerge. In the past few years, many countries have started looking at creating online-only versions of their currencies — and Canada is on the leading edge.

“The Bank of Canada is one of the top three banks in the world in its understanding of digital currencies,” says Andreas Veneris, a professor at the University of Toronto, noting that Singapore and China are the other leaders.

Veneris, who has advised the Bank of Canada on the subject, says the institution has been doing research in this sector for nearly a decade.

Much of this work has been confined to academic papers that mostly made waves — or ripples, at least — among experts. But earlier this year, the Bank of Canada brought the idea into the mainstream by launching a public consultation on creating a digital loonie.

While proponents believe digital currencies could make the financial system more efficient and potentially spur innovation, it’s fair to say this new mode of money has yet to register on most people’s radars. For those not steeped in monetary policy, here is a rundown of what digital currencies are — and why you should care about them.

What is a digital currency?

It’s a kind of money that exists only in digital form with no physical counterpart — you can’t go to an ATM and withdraw it as cash. While that may not seem so far removed from services like Apple Pay, this system uses a radically different framework behind the scenes. While our regular debit and credit payments create the illusion that money is transferred from the buyer to the merchant at the tap of a card, the reality is that it can take banks days to settle the score. Digital currencies will do away with that delay, resulting in truly immediate transactions.

So, is digital money the same as cryptocurrency?

No. They are entirely different beasts. Digital currencies — or central bank digital currencies, as they’re officially known — are issued by a country’s central bank. Cryptocurrencies like Bitcoin are digital assets created by private entities. The whole point of a cryptocurrency is that it is not regulated by a central authority; the whole point of a digital currency is that it is. Cryptocurrencies are speculative assets whose value fluctuates according to supply and demand. Digital currencies are designed to maintain economic stability — the value of a digital loonie would be fixed by the Bank of Canada.

Where did the idea come from? Who else is looking into it?

Back in 1993, Finland issued the world’s first digital currency — the Avant smart card, which was similar to a prepaid top-up card. By the early 2000s, debit cards had become a more affordable way to pay, and the Avant system was shut down.

Thirty years later, 130 countries are exploring the idea of digital currencies and 11 have already launched them. In China, pilot programs have attracted nearly 260 million users and have been implemented in more than 200 contexts, from e-commerce and investing to government stimulus payments.

What could a digital dollar do for me?

For the average Canadian, day-to-day financial interactions should not change all that much. The primary difference would occur behind the scenes in banks, where the transaction settlement process could be completed in fractions of a second, rather than taking days or weeks to resolve.

Speedier settlements will have the largest impact on people who send money to other countries. According to the World Bank, US$626 billion in cross-border transfers was sent by people around the world to friends and family in 2022. That amount is about 5 per cent more than in the previous year. But such transactions can take weeks or even months before they’re fully processed.

Jennifer Lassiter is the executive director of The Digital Dollar Project, a U.S.–based think tank that recently completed a pilot study of how a digital currency might work for payments between the U.S. and the Philippines. She says that the existing system for these transfers is overly complicated and can leave people in the dark for weeks, wondering where their dollars have gone. “At the moment, the sender doesn’t know when the receiver will get the money or how many intermediaries are touching and storing their data in the process.”

Lassiter feels a digital currency could make the process more transparent by providing institutions and customers with insights into every stage of the transaction, but the scope would depend on the design of the system.

In theory, digital currencies could help bolster financial inclusiveness for the underbanked and unbanked individuals, especially in countries with less robust financial systems. Digital currencies lower the cost of transactions and reduce barriers to entry by minimizing frictions and delays. They also enable faster, cheaper and more secure transfers across borders and between intermediaries.

What are the potential downsides?

Ori Freiman, a postdoctoral fellow at McMaster University’s Digital Society Lab, sees three types of risk in digital currencies: operational failure, cybersecurity and privacy.

Because digital currencies exist only on computer systems over the internet, Freiman says, “the infrastructure should be 100 per cent reliable — there is no room for error.” The Bank of Canada is exploring some offline payment solutions, such as loading money onto prepaid cards, as strategies to avoid scenarios where Canadians are unable to access their money due to operational failures.

Because digital currencies involve central banks amassing user data and sensitive payment information at an unparalleled scale, cyberattacks could present a grave risk to Canadians’ financial security. Governments around the world are researching and developing models based on responsible design to address concerns around how to effectively protect financial systems against such attacks.

Given the greater direct involvement of central banks in operating digital currencies, there are also concerns about the extent to which governments may be able to see into the financial dealings (and, as a result, the private lives) of their citizens. While this risk could be mitigated by strong regulatory protections and preserving the independence of central banks, it would be difficult to entirely eradicate the potential for nefarious actions by unscrupulous governments.

Should we plan to say farewell to cold hard cash?

Not any time soon. Currently, the Bank of Canada has no firm plans to launch a digital loonie. There would also have to be a massive decrease in the number of cash-using citizens before the bank would even consider taking physical money out of circulation.

Launching a digital currency would take enormous effort, including replacing existing payment terminals and creating new regulatory frameworks. Most importantly, the move would require public support. Although one survey, conducted by WealthRocket, suggested that 59 per cent of Canadians would be willing to use a digital loonie, the Bank of Canada has not found compelling evidence of such demand in its own research. For now at least, it seems money will continue to exist as bills and coins rather than bits and bytes.

Learn more about digital currencies and the future of finance at Sibos, which runs Sept. 18-21 at the Metro Toronto Convention Centre. For more information, visit sibos.com

Illustration: Monica Guan; Images: Bastian Riccardi, Ilana Gotz (Unsplash)

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