November 25, 2021 – With Canada on the cusp of a new chapter in its monetary history as cryptocurrencies grow in popularity, the Bank of Canada should issue a central bank digital currency to facilitate the emergence of Canadian dollar stablecoins, according to a new report from the C.D. Howe Institute.
In “Two Sides of the Same Coin: Why Stablecoins and a Central Bank Digital Currency Have a Future Together,” authors Mark Zelmer and Jeremy Kronick discuss the use of stablecoins – an emerging cryptocurrency, which unlike others is linked to varying degrees with fiat currency or conventional assets – and how Canada can reap the microeconomic rewards from privately issued cryptocurrencies, without jeopardizing the important macroeconomic benefits that come with Canada’s current monetary sovereignty.
“Having the Bank of Canada issue digital Canadian dollars could play an important role in facilitating the emergence of cryptocurrencies in Canada while helping to retain the Canadian dollar as the country’s principal unit of account,” says Zelmer, former Deputy Superintendent of Financial Institutions. “There would be a direct digital bridge between privately issued cryptocurrencies and a digital Canadian dollar issued by the Bank of Canada.”
Zelmer and Kronick explain that Canadian-dollar-linked stablecoins could become attractive to Canadians by making them convertible into cash issued by the Bank of Canada, and ensuring that stablecoins are well designed and regulated from business conduct, competitive, operational, privacy and prudential perspectives.
As well, Bank-issued digital Canadian dollars could encourage the private sector to introduce Canadian-dollar-linked stablecoins by enabling convertibility to take place digitally without having to rely on physical banknotes.
Finally, stablecoin platforms could be given access to central bank liquidity facilities to ensure transactions settle in good times and bad, and deposit insurance to mitigate the risk of runs.
Further, Zelmer and Kronick believe that a Bank of Canada digital currency should be issued in token form, with decentralized technology for settling transactions so that most of the benefits enjoyed by Canadians with paper banknotes can be retained.
They also recommend that the design be an indirect central bank digital currency, passing over the balance sheet of the financial institution or payment service provider – with the claim on the Bank instead of the intermediary.
Zelmer and Kronick conclude that governments should never lose sight of the fact that while they can encourage Canadians to use crypto assets that are replications of the Canadian dollar, they cannot compel them to do so. The authors also note that Canadians are more likely to favour stablecoins if: 1) governments facilitate innovation in the payments world so Canadians can benefit from ongoing advances in payment systems and crypto-technology; and 2) the purchasing power of the Canadian dollar is maintained by keeping inflation low.
For more information contact: Mark Zelmer, Senior Fellow of the C.D. Howe Institute and former Deputy Superintendent of Financial Institutions; Jeremy Kronick, Associate Director, Research; Lauren Malyk, Communications Officer, 416-865-1904 Ext. 0247, lmalyk@cdhowe.org
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.