The Bank of Canada has shelved plans for a central bank digital currency following pressure from banking institutions concerned about profit margins.Kate Newman/The Globe and Mail
Claude Lavoie is a contributing columnist for The Globe and Mail. From 2008 to 2023, he served as Director of the Economic Research and Policy Analysis Bureau at the Ministry of Finance.
Ottawa’s new framework for regulating stablecoins has been welcomed by crypto advocates.
Federal law would allow companies to issue lunatic-backed stablecoins, cryptocurrencies pegged to the Canadian dollar. Financial services group Tetra Digital plans to launch this early next year.
The government’s move comes after the United States passed the GENIUS Act, raising concerns that Canada will be left behind in the digital currency race.
But Ottawa missed a better opportunity to introduce a central bank digital currency that would make Canada’s banking system more inclusive, stable and efficient. However, the Bank of Canada has shelved its CBDC plan due to pressure from banking institutions concerned about profit margins.
Given that almost 90% of transactions are already done electronically through wire transfers, credit cards, and debit cards, why bother with stablecoins?
Ottawa’s new stablecoin framework is an important step towards monetary sovereignty, supporters say
The answer lies in efficiency. Stablecoin transactions do not need to pass through multiple domestic and international institutions before settlement, allowing for faster processing, lower fees, greater privacy, and easier international transfers. By being pegged to the Canadian dollar, it avoids the extreme volatility of cryptocurrencies like Bitcoin, which has fallen more than 30% in recent months.
However, significant risks remain. The value of a private stablecoin depends on the issuer’s credibility and ability to maintain sufficient high-quality reserves. A “de-pegging” incident occurred in which a stablecoin that was supposed to be worth 1 dollar dropped to less than 90 cents.
Users also need to find someone who will accept their stablecoins or exchange them for traditional currencies, which is especially complicated for cross-border transactions. Unlike credit cards and electronic banking, stablecoins have no fraud detection or consumer protections. A transaction to the wrong address, hacking, or loss of your private key means your money is gone.
Central bank digital currencies offer similar payment benefits and eliminate the risks posed by private alternatives.
CBDC, a legal tender issued by the Bank of Canada, is accepted wherever the Canadian dollar is currently accepted. It has the same backing as the current dollar, and the risk of depegging is zero.
BoC’s Macklem presents high-level vision for stablecoin regulation
An international agreement between central banks will facilitate faster and cheaper exchange between countries’ CBDCs, making it easier to send money to friends and family in Europe, Japan and beyond. Controlling illegal activities will be easier than with private digital currencies.
Holding a CBDC will essentially be equivalent to holding deposits at a central bank (or some kind of new national public deposit bank) that can be accessed via card, computer, or smartphone. The government could use social insurance numbers to create an account for every Canadian, extending the benefits of electronic payments to unbanked populations such as the homeless, the elderly and people in remote areas. Federal money transfers could be made more quickly and efficiently.
With all the benefits of a CBDC, the Bank of Canada has abandoned the idea. Of course, the decision ultimately rests with the government. The launch of a CBDC will require legislative changes, particularly to the Bank of Canada Act and the Currency Act. So why isn’t the government pursuing it? The answer likely lies in the BoC’s stakeholder consultation report.
Bank of Montreal, Bank of Nova Scotia, CIBC, and TD Bank in Toronto’s financial district.Fred Lamb/Globe and Mail
One of the key factors that emerged from these discussions was financial institutions’ concerns about the impact of CBDCs on their operations. A CBDC would remove the incentive to hold funds in bank accounts. Why keep your money in an account that earns virtually no interest and incurs fees when you can keep it more securely at a central bank without any fees? Banks will lose a stable source of low-cost funding.
Banks claim this threatens financial stability. But if Canadians move from bank deposits to CBDCs, it will simply level the playing field between banks and other non-deposit-taking financial institutions.
Although most financial institutions do not have access to bank deposits as funding (First National, Wealthsimple, Manulife, etc.), they still operate successfully. Additionally, the Bank of Canada has the tools to address financial stability issues should they arise.
The real reason for the resistance is simple. CBDCs would negatively impact the profits of large depository institutions and eliminate the market and profits for privately issued stablecoins.
Other concerns include privacy issues and the complexity of the required regulatory framework. While it is worrying that some people trust private cryptocurrency issuers more than public institutions, these challenges are manageable. CBDC can also coexist with physical cash.
More than 130 countries are considering central bank digital currencies, many in testing or development stages, but shelving the idea could be a missed opportunity that future generations will regret.
