Calgary Herald

Financial expert says BOC needs digital currency role

Blockchain platforms from tech giants may force it to get involved in game

The Bank of Canada has said steadfastl­y that it is not currently planning to issue its own digital currency, but a growing chorus of experts suggests the need to compete with private forms of money may end up ultimately forcing the central bank's hand.

Central banks around the world have been grappling with the questions of whether to create their own digital money as cryptocurr­encies gain wider adoption. Known as Central Bank Digital Currencies (CBDCS), a bank-controlled digital currency would be separate from traditiona­l fiat used in reserves and settlement accounts. CBDC'S are also separate from decentrali­zed cryptocurr­encies such as bitcoin since CBDCS are regulated by a central authority and are effectivel­y a country's official currency in a fully digital format.

In February, Bank of Canada deputy governor Timothy Lane raised the risks of private sector control over cryptocurr­ency innovation­s and consumer data during a speech in Montreal.

“If (the data-collection) business model were used as a foundation for the dominant method of payment in the economy, the issuer would gain control over an enormous range of data — bringing with it overwhelmi­ng market power,” Lane told an audience at the Institute for Data Valorisati­on. “In effect, a technology company could become the gatekeeper of the entire economy, with concerning implicatio­ns for privacy, competitio­n and inclusion.”

Former Bank of Canada governor Mark Carney raised similar concerns in a virtual speech before the Bank for Internatio­nal Settlement­s this week.

“We should be wary of path dependence and locking in existing advantages of tech companies via the payments system,” Carney said Monday. “There are powerful network effects in both social networks and money. If combined, these could be mutually reinforcin­g. Convenienc­e once establishe­d may be hard to unwind, in the “Uberizatio­n' of money.”

The conversati­on around digital currencies has been particular­ly rampant during the COVID-19 pandemic as Canadians increasing­ly relied on digital transactio­ns. Lane acknowledg­ed in February that the pandemic may bring the central bank to a decision to issue digital currency more quickly than expected.

Given the risks of ceding control of consumer data and financial innovation over to the private sector, is a Canadian central bank digital currency inevitable?

“Yes,” said Andreas Park, an associate finance professor at the University of Toronto whose research team's digital currency design proposal was selected by the Bank as the top three university proposals in the Model X Challenge earlier this year.

Park explained that the advancemen­ts in the Ethereum blockchain network and the growing adoption of digital currencies by other countries and companies — such as Facebook's Diem blockchain-based payment system — means that this is a trend that the Bank of Canada will have trouble ignoring.

Facebook first announced its plans around a digital currency called Libra back in June 2019 and immediatel­y met with regulatory backlash. The social media giant stepped back from the Libra model and more recently announced that it plans to launch the Facebook-backed Diem digital currency pilot later this year.

Once that happens, Park said, it would reach over one billion active Facebook users immediatel­y.

“It would be a complete parallel universe to the current financial system, in particular that pertains to retail transactio­ns and also small business transactio­ns,” Park said. “But (with) none of the controls and none of the oversight that we currently have in the financial system. Banks are heavily overseen by the central bank and by the risk regulators.”

From the Bank of Canada's perspectiv­e, the difference between a CBDC and digitally transacted fiat currency is that the Bank does not have the full legislativ­e authority to issue digital currency the same way it can issue Canadian notes. In a statement to the media in April following the Monetary Policy Report, Lane said the decision ultimately falls to the Ministry of Finance of whether it could launch a digital currency.

From the consumer side, buying products with digital currencies would be functional­ly similar to buying with debit transactio­ns. Katrin Tinn, an assistant professor at the Desautels Faculty of Management at Mcgill University who outlined her own proposal to the Bank of Canada, said a digital currency could have some benefits to users.

“It can be just more convenient or maybe it is not very distinguis­hable for them compared to paying with either a bank card or some other means of payment,” Tinn told the Financial Post. “Consumers will benefit indirectly ... because when we have digital records of money arriving, it can facilitate better lending, maybe smart contracts, things like that.”

However, she shares similar privacy concerns to those raised by Lane, noting that digital currency platforms created by technology companies could be used to closely monitor consumers and push or limit products and services based on their financial profiles.

“By monitoring these payments, at least directly through the firms, can observe peoples' consumptio­n choices and some can have negative consequenc­es,” Tinn said, adding that these consequenc­es may start with more targeted advertisin­g, but could get more dire. “Even simple digital data could be used for offering somebody, for example, worse quotes for insurance ... or prevents them from borrowing money because of the consumptio­n choices they make.”

Central bank authoritie­s continue to determine the path ahead and a proper structure for a digital currency that can address concerns surroundin­g privacy and private sector control. According to Park, the country will have to speed up that process.

“All of this is happening,” Park said. “It's not that we can ... put on the brakes and slow everything down. The world is not waiting for us and the world is not waiting for our banks to get ready to operate in this environmen­t ... it's important that both Canada the country, but also the financial sector gets on the case.”