Canada’s Central Bank rolls out plan for a Central Bank Digital Currency

BY PAUL JUNOR

There have been discussions internationally about the adoption of Central Bank Digital Currency (CBDC) by many first nation countries within the last few years. In Canada, the release of a Bank of Canada report in October 2022 by Sriram Darbha titled,  “Archetypes for a retail CBDC” has brought this issue to the forefront.

According to investopedia.com there are five vital points to understand:

• A central bank digital currency is the digital form of a country’s fiat currency
• CBDC is issued and regulated by a nation’s monetary authority or central bank
• CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy
• As a centralized form of currency, they may not anonymize transactions as some cryptocurrencies do
• Many countries are exploring how CBDCs will affect their economies, existing financial networks, and stability

For those who are not familiar with cryptocurrency, it is important to have a basic idea.

Cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms.

Once one has a basic knowledge of cryptocurrency, it is vital to know about bitcoin.

According to Investopedia, bitcoin is a digital or virtual currency designed to act as money and a form of payment outside the control of any one: person, group, or entity, thus removing the need for third-party involvement in financial transactions. Bitcoin is thus the name of one of the well-known cryptocurrency, the one for which blockchain technology was invented. The fact that cryptocurrency is digital, or virtual electronic money it has to exist within a blockchain to ensure that every transaction is verified and secured by computers or nodes that use cryptocurrency.

The Bank of Canada’s report discusses extensively what the Central Bank of Canada sees as the goals of CBDC and what is required in order for it to be operational. The report identifies five archetypes which are common patterns that recur in system designs. They include: centralized, leaderless, macro-partitioned, micro-partitioned, and direct. The report compares each of these archetypes with respect to their: privacy, compliance, visibility, scalability, resilience, extensibility, and online and offline payments.

There is a possibility of the Central Bank using CBDC to centralize power over the currency, and economy, around the government. The article quoted from the Central Bank’s report under “Centralized,” states, “The distinguishing feature of the centralized archetype is that the total system state is within the trust zone of and controlled by one entity. This entity would have the power to approve and apply each update or deny it. Users connecting to the system do not hold any state, only credentials that authorize access. An operation such as a transaction or issuance could be fully recorded as a change to information within the zone.”

It means that effectively in a CBDC system Canadian’s money would first be the Central Banks which Canadians merely have permission to access.

The CBDC would hypothetically be a total state controlled by one party. With respect to the leaderless’ archetype, by removing a singular person from making executive decisions, it is by default ascribing power to a bureaucrat who could make political decisions incognito.

The latest report is that $17.7 million has been targeted to be spent toward a CBDC for Canada from the 2022 – 2023 budget by the Trudeau government.