Canada’s central bank has published new central bank digital currency (CBDC) exploration priorities alongside a report summarising often-hostile feedback from a public consultation about a potential digital Canadian dollar that attracted almost 90,000 responses.
The Bank of Canada has consistently adopted a cautious position on the potential introduction of a CBDC and its latest communication takes the same trajectory.
The central bank launched an online questionnaire on features that could be included in a potential Canadian CBDC in May and has published the results alongside summaries of previous focus group research; discussions with the financial sector; and with civil society groups. Respondents to the questionnaire were largely opposed to a Canadian CBDC, as well as to the Bank of Canada actually researching the topic. They were also ‘doubtful that the Bank of Canada would consider public feedback on this matter’.
Canadians value their right to privacy, with many respondents ‘expressing concerns that a digital dollar could compromise that right’, the Bank of Canada summarises. Privacy has consistently ranked at or near the top of potential CBDC users’ concerns in other jurisdictions, for example in surveys conducted by the European Central Bank and Bank of England.
As has been the case with its previous communications on the topic, the Bank of Canada emphasises that a decision to launch a CBDC would be taken by the country’s parliamentarians. “Our responsibility is to ensure the Canadian payments system is ready for the economy of the future,” said senior deputy governor Carolyn Rogers. “The way people pay for things and use money is changing. If Canadians decide a digital dollar is necessary, our obligation is to be ready.”
RELATED ARTICLE Bank of Canada kicks off public consultation on CBDC – our article (9 May 2023) on the launch of the online questionnaire
Privacy balance: up to the politicians
A webpage titled ‘A Digital Canadian Dollar: What we heard 2020–23 and what comes next’ summarises the central bank’s external engagement to date. It contains links to individual reports on the online public questionnaire (a 55-page report); focus groups (18 pages); financial sector discussions (nine pages); and civil society discussions (six pages).
The central bank’s engagement has sought feedback across six themes: privacy; accessibility and financial inclusion; continued access to banknotes; security and technology; a CBDC ‘ecosystem’; and financial stability.
In respect of privacy, many respondents to the online questionnaire ‘did not trust the Bank and other institutions to protect or respect their privacy and were concerned that privacy laws – such as the federal Privacy Act and the Personal Information Protection and Electronic Documents Act – do not offer sufficient protections’.
Respondents said they felt that banknotes would continue to offer privacy and anonymity during transactions over the long term, ‘no matter the government of the day’. They were generally concerned about financial crimes being used to justify limiting privacy or anonymity and the effects that could have on other rights and freedoms, the central bank states.
Looking ahead, the central bank asserts that ‘Canadians have a right to privacy and any digital dollar must not compromise this right’. It states that it will examine options for a CBDC that: would not require Canadians to have identification, a bank account or to disclose private information to anyone to perform ‘basic’ financial transactions – ‘similar to banknotes and some pre-paid cards’; and would allow Canadians to voluntarily provide some form of identification to help retrieve lost or stolen funds – ‘like when opening a bank account’.
‘The potential design of a digital dollar would require an evaluation of the desired balance between maintaining privacy and preventing financial crimes. Deciding how to balance these objectives will be up to Parliament,’ the central bank states. ‘The Bank will explore what is technologically feasible by gathering perspectives from a variety of groups, including government departments and agencies, civil liberties groups, the Office of the Privacy Commissioner of Canada and financial institutions, as well as privacy and inclusion experts.’
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Financial inclusion concerns
Advocates for financial inclusion raised concerns that identification requirements for banking services present a barrier for many Canadians ‘who do not have reliable access to government-issued identification’, the Bank of Canada reports. ‘These advocates believed that a digital dollar should be accessible without the need for identification so it can be inclusive and universally accessible,’ it states.
Looking ahead the Ottawa-headquartered authority states that it will ‘work with Canadians who are underserved by the financial system as well as civil society groups and accessibility experts to better understand the barriers Canadians face when trying to access financial services’. It adds that it will ‘also explore how a digital dollar could address these barriers, including physical, cognitive, economic and situational barriers’.
‘In discussions with national Indigenous organisations, it was determined that out of respect for their capacity and priorities, engagement should be delayed until more substantive work had been done on a digital dollar,’ it adds. ‘We will work with Indigenous organisations to determine how best to proceed and what issues matter most to them.’
Most Canadians placed high importance on having continued access to banknotes. ‘This was because of their wide acceptance, universal availability and transactional privacy’, states the Bank of Canada. It sought to emphasise when it released the online questionnaire – which was open for six weeks from 8 May to 19 June and gained 89,423 responses – that ‘cash isn’t going anywhere’.
‘To ensure greater access to banknotes in the future, most respondents indicated that they would support imposing requirements on merchants to accept bank notes as a form of payment,’ the central bank reports. ‘Civil society groups noted that improving consumer access to and merchant acceptance of cash would help prevent marginalised Canadians from being further excluded from the economy’.
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In respect of security and technology, confidence in the Bank of Canada’s ability to provide the necessary cybersecurity ‘varied significantly’.
‘Respondents to the public questionnaire were largely sceptical of the Bank’s ability to provide cybersecurity, citing various cybersecurity failures by governments in general. In contrast, stakeholders from the financial sector were confident in the Bank’s ability and interested in the practical technological details about how the Bank would implement a digital dollar,’ according to the central bank’s summary.
The head of the Bank for International Settlements (BIS) recently highlighted the need for vigilance and preparedness for the ‘constantly evolving’ security challenges facing CBDCs in a keynote speech. Switzerland-headquartered BIS hosted a two-day event (8-9 November) titled ‘Securing the future monetary system: cyber-security for central bank digital currencies’, during which Agustín Carstens pointed out that a major challenge on the technical side with CBDCs’ potential introduction is that ‘many jurisdictions have yet to decide on which form their CBDCs will take or what technical architecture will underpin their design’.
When respondents to the Bank of Canada’s online questionnaire were asked whether they trust the central bank to issue a secure CBDC resistant to cyberattacks, theft and fraud, nine in 10 respondents lacked confidence in the central bank’s ability to do so. One stated: ‘Anything that is centralised and digital can be exposed to hackers and carries a risk of a cyber-attack. Our own government in the past few weeks have been the victims of cyber attacks. Quantum computers are also on the cusp of development which, once developed, can break essentially all encryption. I do not trust this technology in the hands of bad actors. Cash cannot be hacked.’
Looking ahead, the Bank of Canada states that it will continue its research into the security and technologies that could support a CBDC, including how to provide one that could be used offline. It adds that this research will be supported by ‘engaging with stakeholders with relevant expertise’.
RELATED ARTICLE Central bank digital currencies’ financial inclusion challenge – a Global Government Fintech webinar on 7 February 2023 featured Bank of Canada’s senior special director for fintech Scott Hendry among the panellists
Financial sector want further details
On the topic of a CBDC ecosystem, financial sector stakeholders ‘expressed a need for more information before they could adequately comment’; and, in respect of financial stability, were ‘concerned that a digital dollar could replace bank deposits, reducing a source of funding for their operations’, as well as noting that ‘reducing the physical barrier cash creates could accelerate potential bank runs during a crisis’.
The Bank of Canada states that it will focus on exploring a model where it would issue a CBDC and provide the payment network, with financial institutions and other regulated entities such as payment service providers handling all consumer- and merchant-related activities. ‘This largely reflects the model used for banknotes: the Bank issues banknotes and entrusts the direct relationship with consumers and merchants to the financial sector,’ it explains, stating that it will ‘explore this model further with the financial sector and other interested stakeholders’.
On the topic of financial stability, the Bank of Canada states that ‘to mitigate the potential risk that a digital dollar replaces commercial bank deposits, a digital dollar would not pay interest.’
Looking ahead it states that it will ‘continue to research the relationship between financial stability and a digital dollar’ and will work with government departments and agencies as well as the financial sector ‘to better understand any potential impacts on financial stability’.
The focus group research involved nine meetings held in September 2022 and involving 63 people in total. The report states that participants ‘felt well-served by existing forms of money and payment methods’ and that ‘most participants did not view the CBDC in a negative light but found it rather difficult to relate to the concept.’
RELATED ARTICLE Think you know CBDCs? An A(CID) to Z(KP) test – a feature article (26 June 2023) focused on some of the many technology considerations involved with CBDCs (the article is based on a Bank of England ‘Digital pound: technology working paper’)
Canada’s CBDC journey to date
The Bank of Canada’s CBDC update arrives one year after governor Tiff Macklem said the central bank was ‘moving more from the “R” part of “R&D” [research and development] to the “D” part’ in terms of its CBDC work.
The authority described itself as ‘ramping up contingency planning’ in February 2021, at the time publishing three CBDC design proposals from the University of Calgary, McGill University and the University of Toronto/York University (Toronto).
The central bank had set out one year previously (in February 2020) how – ‘as a contingency plan only’ – it was ‘building the capacity to issue a retail, cash-like CBDC should the need to implement one ever arise’. But it said that ‘significant work’ was required to achieve such a state of readiness. ‘In the years ahead, the Bank will conduct its work on a CBDC in a transparent manner, with regular consultations with stakeholders at home and abroad and public presentation of conclusions and issues, as they emerge,’ the central bank noted at the time.
Bank of Canada staff have also been co-researching CBDCs alongside officials at the US Federal Reserve, Bank of England, Bank of Japan, Sveriges Riksbank (Sweden), Swiss National Bank, the Switzerland-headquartered Bank for International Settlements (BIS) and European Central Bank. The central banks jointly published an influential report, ‘Central bank digital currencies: foundational principles and core features’, highlighting three ‘key principles’ for a CBDC in October 2020.
As a member of the Group of Seven (G7) nations, Canada was also a contributor to 13 public policy principles for the implementation of retail CBDCs published by the G7 more than two years ago.
*** In a separate fintech-related development, Abraham Tachjian has finished his mandate as Canads’s first open banking lead. He was appointed to the role in March 2022. Canada’s progress in developing a legal and regulatory framework for open banking has significantly lagged countries including the UK and Australia.