Driving Through the Roadblocks: A Case for a More Proactive Approach to CBDC from Canada's Central Bank

Abstract

Central banks are not there to ‘put the brake on innovation just for the sake of it’, but to ensure that implications of major changes are well understood so that ‘innovations set the right course for the economy, for business, for citizens, for society as whole.

This sentiment from the European Central Bank’s Director of General Market Infrastructures and Payments, Ulrich Bindseil, is in reference to the challenges faced by central banks in responding to the emergence of digital currencies. Bindseil’s commentary partially references a 2019 speech from the Bank of International Settlements General Manager Agustin Cartens. Bindsel, however, noticeably omits a portion of Cartens initial quote. Cartens original quote reads, “central banks do not put a brake on innovations just for the sake of it. But neither should they speed ahead disregarding all traffic conditions.”

This distinction highlights the question that economists across the world are asking themselves: How should central banks respond to the emergence of digital currency? Borrowing on Cartens’ traffic metaphor, should central banks pull over and let the private sector continue on the digital currency highway alone? Or should they speed ahead through the “traffic conditions” and develop their own central bank issued digital currency (commonly known as “CBDC”). A third option has also emerged, one that has been adopted by the Bank of Canada, which is to drive parallel to the highway waiting for the right time to merge.

The appropriate response depends on each central bank’s perspective on the potential impact of digital currency on their domestic financial system. At risk of overusing the traffic metaphor, the question becomes, are digital currencies an innovative means of filling the potholes in the current payments system? Or are they a paradigm shift that will lead cars to a new highway?