A report from the C.D. Howe Institute has proposed that The Bank of Canada should issue a central bank digital currency that can be converted into a “loonie,” the colloquial term of the Canadian dollar, as cryptocurrencies grow in popularity.
The authors of the report, Mark Zelmer and Jeremy Kronick, explained “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.”
Stablecoins are tied to an outside asset, such as the U.S. dollar or gold, to stabilize the price. Recently nominated vice-chair of the U.S. Federal Reserve, Lael Brainard, has voiced her support for the potential advantages of a central bank-issued digital currency (CBDC).
A move like this from the Bank of Canada will require any potential stablecoins to be well designed and regulated to make them attractive to Canadians, the report said. The digital currency should also be offered as a token, with decentralized technology for settling transactions, allowing Canadians to retain most of the benefits of a paper currency.
“Our preference is for an ‘indirect CBDC,’ one that is allowed to pass over the balance sheet of payment providers, mimicking cash/banknotes on the Bank of Canada’s balance sheet today,” the authors wrote.
The authors also proposed that the move may incentivise private sectors to introduce Canadian-dollar linked stablecoins by making the coins convertible to cash. This would take place digitally, without relying on physical banknotes.
On Feb. 25, Canadian bank VersaBank said it plans to launch a stablecoin “VCAD” which will be pegged to the Canadian dollar on a 1:1 ratio basis.
The Bank of Canada adopting a digital currency could be the start of a new chapter in the way that Canadians purchase their goods. However, according to the report, this move can only be successful if there is a mass adoption by the consumers and there are infrastructures to support such use of digital currencies in place.
The authors concluded, “Canadians are more likely to favour those stablecoins if governments facilitate innovation in the payments world so that Canadians can benefit from ongoing advances in payments systems and crypto-technology, and the purchasing power of the Canadian dollar is maintained by keeping inflation low.”