Globally, the digital economy will displace almost all traditional forms of payment. As cash usage fades into memory, more central banks are getting ready for digital money: retail central bank digital currency (retail CBDC). If countries, including Canada, allow fear or delay to keep their currencies from this movement, there will be a price to pay.
Until recently, the reluctance to introduce retail CBDC centred on technical matters such as interoperability with private sector providers, and legal issues, namely transaction privacy concerns. The former has not been fully addressed, especially at an international level. The latter remains perhaps the chief attraction of relying on cash. But policy makers now have a fairly good idea, at least in theory, about how to address these concerns.
Interest in digital currencies parallels a growing interest in digitalization more generally. Strongly encouraged by the COVID-19 crisis, the trend has advanced plans made by many central banks to introduce digital equivalents of the world’s most important and highly traded currencies. Ten central banks have introduced retail CBDC, the Bahamas’ Sand Dollar being the first, and more than 100 countries are exploring digital currency. China is thought by some to be ahead with the imminent introduction of the digital renminbi. The growing fear of being late to launch a retail CBDC is legitimate among some other central banks who are stuck in the researching phase.
We know, in times of crisis, that the desire to hold US dollars is strong. As I discuss in a recent paper for CIGI, should policy makers take a laissez-faire approach to the problem, then a latent desire to hold foreign currencies will emerge. This partly explains the current appreciation of the greenback vis-à-vis other currencies, Canada’s dollar included.
On the other hand, there is also evidence that holdings of currencies beyond the US dollar have risen in recent years. While it is highly unlikely that any other currency, including the euro or China’s renminbi, will threaten the global position of the US dollar, the current global spike in inflation naturally increases interest in the holding of stable currencies. Historically, inflation has been one reason for abandoning a domestic currency. When a shift away from using domestic cash develops, this translates into a loss of monetary sovereignty.
The prospect of cross-border flows of digital money ought to discipline countries to keep their economic houses in order. However, regulatory impediments to the free movement of money in digital form are likely to remain in place and undercut the potential impact of retail CBDC. Some policy makers argue that digital cross-border payments will reduce transactions costs, such as those for sending or receiving remittances. But despite the entry of fintechs, remittance costs have not declined as much as expected. Blame rests with existing regulations and other restrictions that limit the potential for cross-border digital transactions.
The point is that this is complicated. In our current geopolitical environment, together with a backlash against globalization, international cooperation on facilitating cross-border retail CBDC holdings will be difficult. Impediments to transacting in different currencies may include different national rules, restrictions on institutions accepting payments in different currencies, or varied reporting requirements due to differences in laws around money laundering and corruption prevention.
But all is not lost. As in other areas where the digital economy is expanding, regional cooperation could be a more promising vehicle to avoid constraining the cross-border usage of different digital currencies.
Over the decades, Canada has adopted best practices in its macroeconomic management. The pandemic and its aftermath are testing whether the country can retain its reputation in this field. If the country is successful, a digital loonie can thrive in a world of competing currencies. Failure to do so stands to revive the debate of a few decades ago about whether Canada should adopt the US dollar instead.