The path for a Canadian Central Bank Digital Currency (CBDC)

In early May, the Bank of Canada launched a public consultation on a digital Canadian dollar. We applaud the Bank of Canada for its progress in considering a Central Bank Digital Currency (CBDC) but as a first principle, the Canadian Web3 Council (CW3) believes the Bank of Canada must establish clear criteria and continue to consult with industry about design principles before proceeding with a CBDC. In that regard, CW3 applauds the Bank for taking the first step with this consultation. Most importantly, any consultation or discussion on the development of a CBDC should not delay or distract, but should complement the government’s policy progress into other areas of Web3, namely stablecoins. 

With respect to the Bank of Canada’s consultation, CW3 will continue to be a constructive partner as the consultation process unfolds. Thorough consultation with industry on design principles is paramount to ensure that a CBDC is forward looking and ideally, compatible with permissionless blockchains. Canadians expect that the digital economy of the future allows for interoperability between systems. Similarly, a CBDC can help to solve existing problems of traditional fiat currency in areas such as cross border payments or instant payments. For instance, Canada is currently lagging behind on the implementation of Real-Time Rail (RTR), an initiative that would advance payments modernization in Canada by providing a real-time payment system that supports instant, data-rich payments, giving consumers instant access to their payments. A CBDC can be used to fill gaps within the RTR (upon implementation), Open Banking, and stablecoin infrastructure.

Additionally, digital assets present great potential for enhanced financial inclusion by providing access to digital financial services for individuals who are unbanked or underbanked, allowing them to better participate in the global economy. Any attempt to create a CBDC should include explicit policy objectives about what the new digital asset could do for financial inclusion and modernizing access to government services.

While we assert that CBDCs and stablecoins should coexist and are not mutually exclusive, it is essential to highlight the unique opportunities that stablecoins present. The future of CBDC design must account for and allow for private stablecoin issuers. Canadians are not opting out of the Canadian dollar and moving to cryptocurrency because of lack of access; rather, they are recognizing the advancements in technology and innovation and want to be part of a global and open finance movement. Stablecoins bring dynamism and functionalities that may go beyond what traditional CBDCs can offer, including inter-chain operability, programmability, and potential integration into decentralized finance applications. The allure of these features should not be underestimated in the development of CBDCs.

This is also necessary to maintain global competitiveness, given that many domestic and foreign buyers would not necessarily want to hold CBDCs but would want access to CAD. Restrictions on the private issuance of CAD stablecoins may have unintended consequences, including but not limited to the stifling of fintech innovation, the monopolization of the digital currency market, the reduction of consumer choices and the concentration of systemic risks. This important aspect should be carefully contemplated during the CBDC design process. The European Union has observed this risk and responded by adopting crypto legislation that encourages the use of Euro-denominated privately-issued stablecoins.

In line with other jurisdictions, a CBDC should be two-tired with the participation of both banks and Fintechs to play the role of intermediaries between users and the central bank. This would foster competition and innovation, while ensuring that consumer privacy is maintained. A CBDC must have strict privacy standards, such that the holders of CBDCs cannot be identified or have their CBDCs revoked for reasons outside those currently applied to cash. This will be critical to ensure Canadians have confidence in the system and actively participate in all that the digital economy has to offer.

As Finance Canada, in conjunction with the Bank of Canada, continues its consultation on CBDC, CW3 encourages all Canadians to learn about how they can safely engage with the digital economy. CBDCs, cryptocurrencies and stablecoins should not be political. The ethos and spirit of cryptocurrency is the idea that people can and should have control over their assets without third party interference, intervention or degradation.

CW3 looks forward to continued collaboration in pursuit of these guiding principles to ensure that Canada remains a vibrant market for innovation in digital currency.