Canadian central bank, Banque du Canada, published a study that has hailed central bank digital currencies (CBDCs). The document argues that a digital payment option fosters innovation and enhances competition, leading to an overall increase in welfare. It also suggests that without such an option Canada risks losing its competitive edge in the digital economy.

Canadian Central Bank Makes a Case for CBDCs

The paper authored by Andrew Usher, Edona Reshidi, Francisco Rivadeneyra, and Scott Hendry lays out two scenarios in which the central bank would consider issuing a CBDC. The first scenario is centered on an economy where citizens no longer use cash widely for unspecified reasons. The second involves a situation in which public or private digital currencies are adopted by most people in the country, threatening CAD’s sovereignty. 

The authors noted that the likelihood of digital currencies displacing fiat money in Canada is small, although interest in stablecoin adoption and regulation is on the rise lately. Despite this, the use of digital assets as a means of payment remains a “novelty for a small number of enthusiasts”.

After touching upon the central bank’s decision-making framework briefly, the study goes on to extol the various benefits of approved digital currencies.  The authors point out that a central bank-issued CBDC would offer the same level of safety as cash and the same affordability that cash has maintained in the world for 75 years. Furthermore, they said that compared to credit and debit cards, CBDCs would be more profitable for retailers because they wouldn’t incur the same amount of transaction fees.

“A CBDC could be a simpler competition policy tool because it would provide an alternative low-cost payment instrument for customers and merchants. This would help bring down the interchange fees charged by the established networks,” the study stated.

The Role of Smart Contracts in CBDCs

As per the authors of the paper, the inclusion of smart contracts can be a game-changer for CBDCs. But they were both optimistic and cautious on the innovative solution. On the one hand, they agreed that smart contracts could increase the speed and accuracy of executions by automating processes that are done manually. However, they also acknowledged that the technology could pose a risk to some users because the smart contracts will most likely be developed by independent entities. 

Moreover, the study outlined that complex smart contracts could hurt the network’s performance and scalability,  also known as a scalability risk.

Therefore, the authors recommended that both smart contracts and the programmability of CBDCs need to be analyzed further before the implementation of a digital currency.