Bank of Canada: Towards a Digital Canadian Dollar - If, How, When

Posted on May 26, 2021 by Scott Hendry, Senior Special Director, Financial Technologies, Bank of Canada

Editor's Note: This article is republished in full from the May 2021 issue of Central Bank Payments News. As a special edition produced in collaboration with 2021 The Payments Canada SUMMIT, we have removed the paywall. Access the full issue here

A Trusted Institution

In 1935, the Bank of Canada was entrusted by our federal government to centralize the production of bank notes. As Canada’s newly established central bank, one of our first orders of business was to issue a single currency for the country, and eventually phase out the myriad of dollar-denominated notes issued by various banks and levels of government. The government of the day saw great value in having a standard, stable, national method of payment—particularly after the turmoil of the Great Depression.

Many decades later, our methods of payment have evolved from paper bank notes to include electronic transfers and point-of-sale purchases, and experiments in currency digitalization. With this rapid modernization in how Canadians pay for goods and services, the Bank is researching whether and when Canada should issue a Central Bank Digital Currency (CBDC)—the next iteration of a standard, stable, national method of payment.

This work is perfectly in balance with our new corporate values recently launched on a Bank-wide virtual event with our employees: think ahead, inspire confidence and include everyone. With these in mind, let’s look at Canada’s CBDC journey.

Think Ahead

At the outset, it is important to make one point very clear: the Bank doesn’t envision the devolution or outright disappearance of physical bank notes any time soon—if at all in our lifetimes. Even though we’re seeing a gradual decline in the use of cash, it’s still the preferred method of payment for many people. And certain populations—like marginalized individuals and remote communities—heavily rely on cash in their day-to-day lives.

But it’s been apparent for many years now that, with technology modernizing so many other aspects of our lives, the physical nature of currency should also evolve to meet the changing demands of businesses and consumers. Recognizing this, the Bank started looking at the digitization of money almost a decade ago to prepare for a day when the Government of Canada may take a decision to issue a CBDC.

Up until last year, the Bank’s main research was truly about “thinking ahead.” We considered hypotheticals like what a future digital currency might look like, and where that responsibility should lie.

Regarding who should take responsibility for a future CBDC, Deputy Governor Timothy Lane was unequivocal in laying out the Bank’s findings in a speech from earlier this year.

“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,” DG Lane said. “Only a central bank can guarantee complete safety and universal access, and with public interest—not profits—as the top priority.”

Deputy Governor Timothy Lane. Credit: Bank of Canada

The Bank also considered what conditions may prompt a decision to issue a CBDC. We imagined a scenario where a decline in cash to the point where merchants start refusing to accept cash, and banks scale back their cash processing. We also considered the need for a CBDC if private cryptocurrencies—such as Bitcoin and stablecoins—or a digital currency of another country became popular. There may be other scenarios that could also support the issuance of a CBDC, including growing the digital economy through providing a digital currency to underpin such ideas as smart contracts, programmable money and the Internet of Things.

These scenarios would each present their own unique challenges. If our society was mostly cashless, for example, disadvantaged groups like people who are underbanked and unbanked would be negatively affected. And society would not be well-served by a proliferation of cryptocurrencies whose values aren’t backed by the central bank—let alone the risks to Canada’s monetary sovereignty that would come with widespread use of a payment instrument not denominated in Canadian dollars.

As you can see, the Bank has been diligently thinking ahead. We have anticipated future challenges and changes like the disappearance of cash. And we are preparing so we can be proactive—not reactive—in supporting the growth of the digital economy and the desires of the Canadian public. This is an important part of building and maintaining the confidence of those we serve as a trusted institution.

Inspire Confidence

From this initial thinking, our research has advanced. While we do not see a need now to issue a CBDC, we are preparing for a day when the Government of Canada may give us the green light to launch a viable CBDC that Canadians could use with confidence. Our research on policy and design has shifted accordingly, from “if” to “how.” We have established some key features of a CBDC, and we are asking some tough questions:

Safety—Money should be a safe store of value that consumers can use with confidence when making payments. How do we design a digital currency that Canadians will trust and use with ease, as they have with our award-winning bank notes?

Universal accessibility—Access to money is essential for participation in the economy and must therefore be available to everyone. How can we ensure a CBDC would provide the same benefits as physical bank notes?

Privacy—Canadians are concerned about maintaining an appropriate degree of privacy both in relation to private businesses, such as merchants and payment providers, and in relation to the government. What is the best way to protect the privacy of individuals and businesses, while also guarding against the use of a CBDC for illicit purposes?

Resilience—Because it is crucial for economic transactions, money needs to be available all the time, regardless of circumstances. How do we design a CBDC that is available if ever there is a power blackout, a natural disaster or human-created attacks on the system that could block access to a digital form of money?

Competition and efficiency—More competition in payments will reduce costs, improve efficiency and service levels, and promote innovation and a wider range of products. How could we design a CBDC that would serve as a competitive alternative to private payment options, in the same manner that cash has for many years?

Beyond some of the positive features any CBDC should have, we also need to consider any risks or challenges presented by a digital form of money.

One of these risks is the possibility of disintermediation of the banking sector whereby excessive funds are moved out of financial institutions to be held in CBDC. This could reduce private sector access to a large and stable form of funding that has served them well during crises of the past.

Another possible risk is whether a CBDC would create conditions for a faster or larger bank run, should one occur during volatile financial times. Given Canada’s stable financial system, this is unlikely. But as lender of last resort, the Bank would need to be prepared to act if a financial institution or the entire system was at risk. So we are investigating how to design a CBDC so these risks are well-managed.

We also have to look at the effects of a CBDC on the Bank’s balance sheet. Releasing a digital version of cash—in addition to the physical bank notes in circulation—could trigger an increase on the liabilities side of our balance sheet, requiring a similar increase on the assets side. We must also prepare for the possibility that a CBDC could lead to greater volatility in our balance sheet.

As you can see, the background work we’re doing to diligently prepare for a viable CBDC is crucial to identifying what we want in a digital currency—and as importantly, what features we must guard against. There are many outstanding policy and design questions that must be answered before the Bank would be ready to act on a Government of Canada directive to issue a CBDC.

Beyond these considerations, we are making a concerted effort to start communicating our CBDC journey with Canadians. Because the key to our success on any policy front is clearly explaining our efforts and our intentions behind them.

“In a nutshell, we need to spend more effort speaking and listening to the citizens we serve,” said Governor Tiff Macklem in an August 2020 speech. “Diversifying our engagement improves our capacity to make better policy decisions and enhances our legitimacy as public institutions. That is more important now than ever as we grapple with COVID‑19 and its harsh economic consequences, which affect everyone.”

In recent years, we’ve ramped up our external communications around the concept of digital currencies. This includes a public speech by Deputy Governor Timothy Lane to introduce the concept of a CBDC in February 2020 and an update a year later. We are also continuously updating our fintech website to make our research and findings accessible to all Canadians.

Include Everyone

Our outreach on CBDC is part of a larger effort within the Bank of Canada to reach out across the country and talk more with the people we serve. We want to hear unique perspectives from coast to coast to coast about issues that affect their financial well-being. For example, we recently consulted broadly with diverse groups and individuals about our upcoming inflation targeting renewal agreement, and we released our findings online.

On the CBDC file, our stakeholder outreach is well underway. We are moving forward with three main objectives:

  • raising greater awareness and understanding of the Bank’s work towards a potential CBDC;
  • ensuring our stakeholders’ views about the drivers for a CBDC and its design features are taken into consideration as our work advances; and
  • learning from the people we serve what positive social benefits they would look for in a CBDC.

We have already started important conversations with three main groups: federal government partners, stakeholders in the financial sector and civil society organizations. We are also planning to repeat the successes we achieved with our outreach on inflation targeting by speaking with Canadians about their payment needs and how they feel about a CBDC—and reporting back on what we’ve heard from them. We’ll use all of this information to inform the design of a CBDC as well as the Bank’s decisions on policy and communications.

Because at the end of the day, we don’t truly know whether a critical mass of our population would want to use a central bank digital currency when cash, debit and credit cards, and electronic transfers are readily available and easy to use. It’s important we clearly identify—and communicate—the potential benefits to end users, versus the alternatives already at hand.

Where To From Here

A CBDC is by no means a foregone conclusion. But we must prepare for the day when we may take that next step in the evolution of payments in Canada.

As DG Lane said in his recent speech: “The Bank will continue to explore the possibilities of a digital currency that would be an electronic version of the bank notes that Canadians trust and rely on. We will issue such a currency only if and when the time is right, with the support of Canadians and the federal government, and with the best evidence in hand.”

In doing so, we will continue to build on the long-standing trust we have established in promoting Canada’s economic and financial welfare. And our work will be guided by our core promises to always think ahead, inspire confidence and include everyone.

Latest Posts

  • Bank of Japan: Pursuing Safety and Efficiency of the Payment and Settlement System as a Whole
  • The Big Differences Between CBDC and Mobile Money
  • Afghanistan Digital Payments and the Rise of AfPay


CBDC, Modernisation, Innovation, Digital Payments