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In September 2024, the Bank of Canada announced that it was
shelving the idea of a retail central bank digital currency (CBDC)
after years of research that began in 2017. This research included
a public consultation process in 2022, which totaled nearly 90,000
consultation responses.1 As recent as summer 2024,
the Bank of Canada argued that Canada would need to stay at the
forefront of innovation of digital currencies to maintain monetary
and regulatory sovereignty.2 However, even as
Canadians continue to move away from a cash-based economy towards
digitalization, the Bank of Canada has decided to shift its efforts
to broader payments system research and policy development.
Across the globe, more than 130 countries have begun to explore
the idea of a CBDC, but so far, only the Bahamas, Jamaica, and
Nigeria have successfully launched one. With Canada putting its
CBDC project on hold – but implying that it was prepared to
resurface the concept in the future – this article discusses
how this will affect banking and digital assets in Canada.
What is a Central Bank Digital Currency?
CBDCs blend blockchain technology with legacy financial
institutions to build, in theory, a more reliable and efficient
monetary system. While there are proposed models of CBDCs that do
not involve the use of blockchain technology, these projects tend
to be outliers in the CBDC world. The CBDC system requires central
economic banks to mint digital tokens, instead of or in conjunction
with, printing fiat currency. These digital tokens would also
create a manner of digitally transacting that would be safer, more
efficient, and traceable.
The use of blockchain technology with CBDCs involves the use of
an immutable ledger, that can be decentralized or centralized
depending on the needs of the central bank, to validate
transactions. Having the underlying blockchain technology act as an
intermediary creates a safer and more efficient transacting
environment than having individuals and banking institutions
validate transactions, both of whom are susceptible to human error.
Further, this technology allows a central bank to record
transactions on the blockchain, reducing the risk for fraud and
allowing nearly instantaneous transactions.
CBDC vs Cryptocurrency
The phrase “digital tokens” often creates a
comparison or a likening to cryptocurrency, but CBDCs are distinct
from conventional blockchain tokens. CBDCs are a digital version of
a country’s fiat currency, meaning that the value of the
asset is equivalent to an equal proportion of fiat currency. For
example, a fungible physical Canadian dollar (or a Loonie) would be
equivalent to a hypothetical fungible Canadian digital dollar (or
what we’ll call an “eLoonie”). This contrasts
with cryptocurrencies which tend to derive their value from
multiple factors, such as, their rarity, utility, and investor
confidence in the cryptocurrency project.
CBDC & the Digital Economy
Certain forms of digital currency are not foreign to modern
economic jurisdictions, where large portions of the consumer
population and businesses have transitioned to a cashless economy.
This does, however, invite the question of what the difference
would be between the introduction of a CBDC and the way the economy
currently operates in Canada. The key difference would not be in
the manner that consumers make online payments, but rather in the
manner that payments on the backend occur.
In a traditional banking system, even with the transition to a
more digital economy, intermediaries are required to validate
transactions. On a smaller, retail-scale, this would be exemplified
by credit card companies validating online transactions between the
consumer and the retailer. On a larger, institutional scale, this
would be exemplified by banks holding funds from a transaction in
escrow, only releasing funds multiple business days after the
transaction has closed. In turn, the use of intermediaries in the
traditional monetary system requires a series of checks and
balances across multiple parties which increases transaction costs
and time.
Alternatively, CBDCs can leverage blockchain technology to
eliminate the need for multiple intermediaries to validate
transactions, which increases the security of transfers, makes
transactions nearly instantaneous, and decreases transaction costs.
Both of these processes are possible due to the nature of
blockchain as a ledger that auto-authenticates transactions.
Fewer Intermediaries vs No Intermediaries
Importantly, not all CBDCs are identical. For example, the level
of intervention a central bank has of its digital currency is
unique to the framework used to establish the CBDC. For example, if
a CBDC is operated on a centralized approach where the central bank
hosts the transaction ledger, then the central bank becomes the
intermediary that needs to validate transactions. On the other
hand, if a CBDC is operated on a decentralized ledger, then the
transactions are validated via the users of the digital currency or
a third-party intermediary that hosts the
blockchain.3 While some forms of CBDCs still
involve the use of intermediaries, the validation of transactions
is still significantly more efficient through a CBDC than by the
traditional forms of digital transactions, regardless of whether
the central bank takes a centralized or decentralized approach.
This is because the blockchain ledger that underlies either
approach can auto-validate transactions based on the protocol it is
provided, meaning that the transaction is merely recorded by the
bank instead of being manually approved.4 Thus, the
significance of the centralized/decentralized approach largely
depends on the level of control and oversight the central bank
wishes to exert over the CBDC.
The Difference Between CBDC and Stablecoins
What about Stablecoins?
With the proliferation of blockchain technology since Bitcoin
launched in 2009, decentralized financial (DeFi) platforms have
leveraged the same process proposed by CBDCs to actualize faster
and more secure transactions. A common question posed by opponents
of CBDCs is why there needs to be a state-controlled form of
digital currency, as the technology that underlies this process was
created with the intention to create stateless, decentralized
currency. Instead, the opponents posit that stablecoin projects
could fill this gap. Stablecoins are cryptocurrency tokens that aim
to have a fixed value by having their value pegged to an underlying
reference asset. Generally, stablecoins peg themselves to popular
fiat currency such as the US dollar, or to popular exchange-traded
commodities such as gold. For example, one of the most popular and
well-known stablecoins is USDT, which was launched by Tether in
2014.
Although stablecoins can vary widely in their collateralization
and the underlying pegged asset, the general difference between
stablecoins and CBDCs is that stablecoins tend to have a greater
scope of decentralization because they are operated by private
companies who prefer to not act as intermediaries. This is
appealing to members of digital asset communities, as it aligns
closely with the values that they believe digital assets and DeFi
platforms should contain – namely, self-governance, privacy,
and efficiency.
Stablecoin Regulation
On the other hand, proponents of CBDCs argue that there is an
implicit danger in allowing DeFi platforms with privately backed
and owned stablecoins to become the default method of digital
currency payments. This is because the lack of regulation in this
space can cause volatility that can harm investors, users, and the
asset that underlies the stablecoin. This argument is currently
under review in the United States, with the US Senate aiming to
regulate stablecoin as a digital payment method rather than opt for
CBDCs. Given the close proximity between regulatory jurisdictions,
it is possible that Canada will follow suit.
In April 2024, the US Senate introduced bipartisan legislation
to regulate stablecoins.5 This bill proposes a
comprehensive regulatory scheme that targets the regulation of
stablecoin issuers, putting the responsibility for safe trading in
the hands of crypto trading platforms (CTPs). The hope is that this
top-down approach will prevent fraud in the space and prevent
foreign actors from influencing US economics through the use of
digital currency that is pegged to the US dollar. The impetus for
this regulation likely arose through controversies in the digital
asset space, such as when a stablecoin called TerraUSD, which was
pegged to the US dollar, depegged in 2022 and erased over $50
billion of value.6 This concern appears to continue
to be top of mind for US regulators when considering the popularity
of USDT and its creator Tether, which has faced sanctions in the
past from US regulators for inaccurately stating their stablecoin
backing.7
The US proposed stablecoin regulatory scheme is also in staunch
opposition of the Securities and Exchange Commission’s (SEC)
current approach to digital asset regulation, which is “
regulation through enforcement” or piecemealing
regulation together through the course of various legal proceedings
against digital asset platforms. As such, this proposed stablecoin
regulation would be a landmark form of digital asset regulation in
the US.
Future of CBDCs and Digital Currencies
Given the regulatory push for stablecoins in the US, alongside
Canada’s recent shelving of a CBDC after nearly seven years
of inquiries, it appears that the future of the digital economy in
Canada will not involve CBDCs. Instead, Canada may follow the US in
issuing regulation for stablecoins and adopt these regulated DeFi
tokens as the primary catalyst for actualizing a more efficient,
and more safe, online economy.
However, Canada’s adoption of stablecoin regulation is not
dependent on the US successfully passing their proposed stablecoin
legislation. As opposed to the SEC’s regulation by
enforcement scheme as discussed above, Canadian provincial
securities regulators have opted to create comprehensive regulatory
guidelines for CTPs, which abstractly resemble the form of
regulation that the proposed US stablecoin bill aims to impose on
stablecoin issuers.
Moreover, Canadian provincial securities regulators have already
turned their mind to stablecoin regulation at home. In October
2023, the Canadian Securities Administration (CSA), a conglomerate
of all Canadian provincial securities regulators, released
Staff Notice 21-333 (the Notice). In this Notice, the CSA
provided CTPs with terms and conditions regarding the trading of
“value-referenced crypto-assets” which includes
stablecoins. In the Notice, the CSA also highlighted to CTPs that
stablecoins could be subject to further securities law and
regulatory considerations, leaving the door open for a
comprehensive stablecoin regulatory scheme similar to the proposed
US scheme.
Next Steps
With the digital economy growing at an unprecedented rate over
the past five years, regulatory frameworks have struggled to keep
pace with technological advancements. As the US shifts its focus
towards stablecoin regulation rather than CBDCs, and with Canada
seeming to be following suit, DeFi platforms and CTPs should
prepare for potential regulatory oversight and compliance
requirements in Canada. Moreover, banking institutions need to stay
informed about these regulatory changes and understand how they
might affect their intermediary role in financial transactions.
Footnotes
1. See Bank of Canada, “Digital Canadian Dollar
Public Consultation Report” (November 2023), online (pdf):
2. Bank of Canada, “The Role of Public Money
in the Digital Age” (10 July 2024), online (pdf):
3. European Data Protection Supervisor,
“Central Bank Digital Currency” (last accessed 10
October 2024), online:
4. IBM, “Central Bank Digital Currency (CBDC)
and blockchain enable the future of payments” (17 August
2023), online:
5. Turner Wright, “US senators introduce new
stablecoin bill” (17 April 2024), online:
5. Unchained, “What Is the Newly Proposed US
Stablecoin Bill?” (8 May 2024), online:
information on controversies in the digital asset space please see
our Cassels Comment on FTX.
7. See for example, Chris Prentice, “Crypto
firms Tether, Bitfinex to pay $42.5 mln to settle US CFTC
charges” (15 October 2021), online:
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