Central Bank Digital Loonie: Canadian Cash for a New Global Economy
Andreas Veneris, Andreas Park, Fan Long, and Poonam Puri
Today's global economic digitization of society, driven by technology trends, continues to advance at exponential speeds. Billions of Internet of Things devices have already made their way into our daily lives, our homes, and cars, but also into health care, manufacturing, supply chains, and other infrastructure. This development is in sharp contrast to the financial sector which still operates on legacy infrastructure(s). The net effect is that current systems of payment lack the flexibility to adapt to the digitization of the economy. They remain slow, clunky, and expensive; often one receives a digital service, or even physical goods, faster than the merchant receives the payment. Further, the emergence of Decentralized Finance, through blockchain technology, has already demonstrated a capacity to disrupt the financial sector, impact national sovereignty, and affect established monetary transmission channels. Hence, it is no surprise that nations and tech firms are now building new digital infrastructures for finance, banking, and payments that circumvent those legacy practices.
Governments around the globe equivalently and themselves in an awkward position. On the one hand, monetary policies rely on the established functions of the financial sector. For many decades, banks have conveniently served as deputies in enacting those policies, along with efforts to squash money laundering, tax evasion, and the financing of terrorism. On the other hand, over the past decade, governments have publicly recognized the need to enable digital innovation to keep their economies competitive. Further, they acknowledge the responsibility to enable their citizens to protect their privacy from unabridged data harvesting, and the need for financial inclusion in core economic national activities, irrespective of means and location. Finally, economies such as Canada's risk that their home currency is displaced, or their national security gets severely compromised if consumers and businesses alike to a more convenient, let alone foreign, digital payments alternative.
Against this backdrop, in recent years many central banks have raced to explore, research, and test the issuance of digitally native money, or Central Bank-issued Digital Currencies (CBDCs), in an effort to rediscover the very essence and use of \at cash". The Bank of Canada (BoC) has emerged as a thought leader on CBDCs at an international level having spent almost a decade and significant resources on this endeavor. The Bank is now preparing to put itself in a position where it can issue a digital loonie should certain conditions mandate it. As the BoC has been contemplating the design of a CBDC for some time, given the scale of the particular enterprise, it wanted to sample ideas at arm's length. To do this, in early 2020, the Bank ran a competition among universities to research and propose a CBDC design. Being a finalist in this competition, this manuscript presents a design proposal for a Central Bank Digital Loonie (CBDL) based on careful academic research of the possible technological, legal, and economic components of such an unprecedented and historic expedition.
Here, a two-phased KYC-backed approach is proposed for a CBDL that mitigates risks at a global scale, promotes financial inclusion and welfare, and safeguards Canada's socioeconomic sovereignty in the IoT/5G-and-beyond/AI era. The design also creates new monetary transmission channels for the BoC if needed, it protects user's data and anonymity, but it also leverages Canada's past social investments. In the first phase, the BoC introduces a centralized platform that establishes digital cash with an authentication protocol that leverages existing infrastructure, yet safeguards users' privacy/data. In the second phase, the BoC expands the platform to become the backbone (and supervisor) for an enterprise-level blockchain as a common resource. This transforms CBDLs into "programmable e-money" that enables Canadians to operate, innovate, compete and thrive in the new global digital economy. Although the BoC has not committed to issuing a CBDC, it already has a concrete contingency plan. The findings here urge it to issue digital cash sooner rather than later. After all, as Arthur Clarke squarely put it: "the truth, as always, will be far stranger."