Benefits and risks of CBDCs - Interview with Payments Canada

First, Cyrielle please tell us something about Payments Canada (though some of our readers are already familiar with your organisation) and how does your professional background tie into the organisation’s goals?

We are responsible for bringing together a diverse sector to serve Canadians and for empowering a new era of modern payments where a robust and vibrant economy thrives.

I am the Chief Strategy Officer at Payments Canada, but also lead the research team, which informs the strategic direction of the organisation by monitoring payments trends and activities in Canada and abroad. I joined the organisation in 2019 as Head of Research and Strategic Foresight, bringing a strong background in payments, retail and commercial financial services knowledge and research experience.

How has the pandemic influenced payments innovation in Canada? Do CBDCs play a role here?

Payments Canada continues to monitor the impact of COVID-19 on payments in Canada through moment-in-time studies that are published to payments.ca.

Our most recent was published March 2021. What we found is that the COVID-19 pandemic continues to impact Canadians spending and purchasing habits and has accelerated a number of trends we’ve seen over the last few years - including the adoption of digital and contactless payments in Canada. We also found that almost half (42%) of Canadians report that COVID-19 has changed their digital and contactless payment preferences for the long-term.

The study also highlighted how businesses can better meet consumer needs as the pandemic continues. For many retailers, this includes building and leveraging an online presence, and offering convenient and secure payment options for customers at point-of-sale.

The pandemic’s impact on the use of digital payments has brought forward the development of central banks digital currencies (CBDC) around the world. More than 80% of central banks in the world - including the Bank of Canada - indicated that they were, in some shape or form, looking at the development of a CBDC at the onset of the pandemic. Understanding the implications of a digital alternative to fiat currency is seemingly the next logical step.

What benefits do CBDCs bring to the Canadian consumers and businesses? Is there a need/demand for these types of money on the Canadian market?

While this varies dependent on the design of the CBDC itself, a retail CBDC that is accessible to the general public could be used to achieve the following, among other, examples of benefits:

● Boost financial inclusion and promote general well-being of affected populations;

● Promote the central bank’s ability for monetary policy transmission and provision of real-time regulatory monitoring;

● Reduction of the underground economy and illicit cash transactions; 

● Offer a level of privacy not typically associated with digital payments (dependent on the design); 

● Provision of domestic payments safety and resilience: a CBDC could boost the use of central bank money, arguably the ‘safest’ and risk-free money available for end-users. Access to central bank money is particularly attractive during times of financial stress where faith in commercial banks wavers and people look for more stable options for their money;

● For governments, CBDC could be a tool that could shorten the process of getting disbursements to citizens (i.e., CERB) as CBDC can go directly into a mobile wallet/ bank account, reducing the use of cheques/act as alternative to direct deposits.

How can retail CBDC coexist with, and complement, fiat currency?

CBDC is fiat currency. It is still ultimately backed by trust in the central bank and government, like fiat (or at least notes and coins) as we know it today. Retail CBDC merely moves these physical expressions of money into the digital space. Consequently, they can coexist in so far as the central bank or government wants them to coexist. It is important to distinguish coexistence from extreme experiences we have or are observing today. Sweden suffered a natural elimination of cash hence its digital krona. China, by contrast, expects to be fully live with its digital yuan by the 2022 Summer Olympics and, with that roll out, they also plan to phase out cash. However, this does not necessarily mean other jurisdictions will follow Sweden or China. The Bank of Canada has signalled that a CBDC would co-exist with existing payment instruments like cash, rather than to serve as a full replacement if implemented.

If we go beyond the Canadian payments market, what are the risks associated with retail CBDCs including regulation and legislation between geographies, consumer protection and trust, and financial stability?

As with any new technology, there comes unexpected risks. CBDC interlinkages across jurisdictions, like the current pilot between the Bank of Thailand (BOT) and the Hong Kong Monetary Authority (HKMA), will require an approach to compliance that doesn’t result in conflict with, for example, domestic consumer protection laws. The lack of an international regulator and oversight body poses challenges in a jurisdictional-based system like payments, and it will be important to provide guidance to participants in how to balance their compliance obligations in multiple markets.

Examples of issues that would need to be resolved in the rules and regulations include:

● message translation/conversion from jurisdiction to jurisdiction;

● cross-border dispute resolution;

● data transparency and privacy;

● variance in regulations by jurisdiction and, in many cases, by regions within a jurisdiction;

● what applies during origination of a transaction versus what applies to the beneficiary of the transaction as it crosses jurisdictions;

● when and which regulations apply in transit;

● differing Know Your Customer (KYC), fraud and Anti Money Laundering (AML) requirements and related message standards.

You have recently spoken at the Wholesale and Retail Central Bank Digital Currencies event organised by Open Banking Expo. For those who could not join, could you please share some learnings from the event?

I was pleased to participate on a panel at Open Banking Expo.’s Retail Central Bank Digital Currencies event entitled Retail CBDC: Weighing up the Benefits and Risks. One key learning that I took away from the event was that no matter the jurisdiction’s motivation for exploring or implementing CBDC, there are a lot of important considerations to make. How can CBDC be designed in a way that is interoperable with existing systems? How will the CBDC be used in the current market? How will the market react? Many issues, like universal access, adoption, resiliency, and privacy must be thought through carefully. CBDC has the potential to deliver important benefits, like financial inclusion and global competitiveness, but it will take time and careful consideration to get there.

About Cyrielle Chiron