The Digital Loonie

It's literally true that some of the $20 bills moldering in my wallet have been there for the past year.  Almost all my financial transactions have moved to online or contactless payment, and I'm surely not alone. Today Bank of Canada Deputy Governor Timothy Lane delivered a lengthy speech to the Instiute for Data Valorization (what dat??) in Montreal on the subject of "Payments Innovation beyond the Pandemic". Let's take a look.

Lane began his remarks by describing the rapid growth in digital transactions since the pandemic began:

A survey of Canadian retailers shows that e-commerce has nearly doubled from pre-pandemic levels.

.....In our most recent Business Outlook Survey, nearly two-thirds of participating firms reported that they are making some kind of digital investment. 

.....Among these developments is a shift toward the increasing use of digital payments. For example, a November 2020 survey found that two-thirds of small businesses now accept payments online—and half of them started doing so only recently.

Even when Canadians pay for goods in person, contactless options appear to be gaining traction. Interac reports that the volume of Interac Flash transactions grew by two-thirds in July 2020 compared with April.  Consumer surveys also report that contactless payments have increased.

Most of the technologies Lane is describing here are well-established. Indeed, it is almost a surprise that it has taken the pandemic to get so many businesses and consumers to embrace them more fully. Still, it is very clear that there is no longer any way back to the old cash-in-hand world.

Lane then went on to talk about changes in the Bank of Canada's physical bank notes, before musing about the possibility of a government-issued digital currency -- a "digital loonie":

.....for the past decade or so .....and we’ve been asking ourselves: could Canada and Canadians benefit from a digital form of cash?

.....In a speech in Montréal a year ago, I gave our preliminary view: we did not see a need for a central bank digital currency at that time, but we could imagine scenarios that could make a central bank digital currency beneficial in Canada. 

.....A year later, our view remains unchanged: a digital currency is by no means a foregone conclusion.

.....That said, the world has been changing even faster than we expected.....  And so our work to prepare for the day when Canada might want to launch a digital loonie—backed by the Bank—has also accelerated.

....We are not alone. In a recent survey, almost 60 percent of central banks reported the possibility that they will issue a central bank digital currency within six years. This is up from less than 40 percent only a year ago.

Having said that, Lane was quick to point out that he is not a fan of the existing digital currencies:

The other scenario I raised in my speech last year is the increasing use of digital currencies created by the private sector, including cryptocurrencies and so-called stablecoins. While these products have existed for several years, some could see a boost from the acceleration of digitalization in the midst of the pandemic.

Even in this increasingly digital economy, though, cryptocurrencies such as bitcoin do not have a plausible claim to become the money of the future. They are deeply flawed as methods of payment—except for illicit transactions like money laundering, where anonymity trumps all other features—because they rely on costly verification methods and their purchasing power is wildly unstable. The recent spike in their prices looks less like a trend and more like a speculative mania—an atmosphere in which one high-profile tweet is enough to trigger a sudden jump in price.

Lane then poses two fundamental questions: 

.....Are there benefits to issuing a digital form of money? And if yes, who should do so?

In response to the first question, we don’t yet know whether many Canadians will actually want to use a stablecoin or any other kind of digital currency when they have alternatives available—cash, debit, credit and electronic transfer. 

.....In response to the second question, if the public does want a digital cash-like currency, some good reasons illustrate why a central bank—a trusted public institution—should issue it.

Currency is a core part of the Bank’s mandate, and the integrity of our currency is a public good that all Canadians benefit from. Only a central bank can guarantee complete safety and universal access, and with public interest—not profits—as the top priority.

Lane goes on to speak at length about modernizing payments systems and specific issues relating to cross-border transactions, but let's stop at this point and consider the truly fundamental question: what would a central bank-issued digital currency even look like?  The "stablecoins" that he refers to already exist -- Facebook mused about issuing one last year -- but the differ from the more prominent digital coins such as Bitcoin and ethereum in that they are asset-backed in order to provide greater stability and utility as a payment mechanism. 

Today's Canadian dollars, like other currencies, are in effect backed by the full credit of the Government, whether we are talking about notes and coins or digital money. Would a digital loonie have that same backing, or rather, would anyone accept a digital loonie that did not have such backing in preference to the  existing government-backed loonie that can already be widely used for digital transactions? It is hard to see why anyone would want to do that, and so it's not obvious why issuing a specific digital loonie would add much, if anything, to the range of payments alternatives that Canadians already use.