Bank of Canada Governor Tiff Macklem spoke yesterday about a possible Canadian central bank digital currency (CBDC). Next year, the bank plans to consult the public on a possible CBDC. In particular, they want to know what the public’s expectations are of a digital currency and what features would be important to them.

As part of the central bank’s R&D in digital currency, it is moving from the research phase to the development phase to be prepared if the need to issue a CBDC arises. However, the governor made it clear that the decision to issue a CBDC rests with parliament.

CBDC Motivations

Macklem outlined three drivers that could result in launching a retail CBDC.

First, it would be a dramatic decrease in the use of cash. That being said, cash in circulation is growing in Canada, although not at the pace of nominal GDP. “We could lose control over our own monetary sovereignty if they start using other digital currencies,” Macklem said, likely referring to foreign CBDCs, given his next point.

Another motivation is whether Canadians have largely adopted a private sector stablecoin, particularly one that is not denominated in Canadian dollars. Because this would also challenge monetary sovereignty. Macklem cited the abandoned Diem project started by Facebook/Meta as an example.

Dollarization through digital currency has been a central bank concern for some time. In early 2020, the central bank stated that a US CBDC could trigger a digital Canadian dollar. And the sentiment was reiterated later that year at an EU conference.

The Governor recognized that the decrease in the use of cash and threats to sovereignty are defensive motivations. On a more positive note, he believes that over time, as the economy becomes increasingly digital, it might make sense to give Canadians a CBDC option.

Meanwhile, MIT Media Lab’s Digital Currency Initiative (DCI) is working with the Bank of Canada as part of its research work. DCI is also working with the Federal Reserve Bank of Boston on the Hamilton Project and the Bank of England.

Among other research, last year the Bank of Canada ran a CBDC design challenge with three universities with some interesting results.