Oh, Canada…

What has been the experience of Canada with their CBDC?

So many things happen first in either Canada or the U.S. and then migrate either north or south.  Just recently, the Canadian government began to experiment with a digital loonie. So, what lessons can we learn from our neighbors to the north, RE: floating digital currency?    Let’s take a snap-shot.   (But, keep it under your tuke, eh?)

OK, first question is, What IS a CBDC?

This is a good and simple place to start.  The Central Bank Digital Currency (CBDC) is essentially the digital equivalent of a state’s fiat currency.    But, please remember, these are not cryptocurrencies.  In Canada, the CBDC would be backed by the Bank of Canada.   Cryptocurrencies are issued by private companies and their valuations are wildly volatile, responding instantly to the whims and rumors of the market.   Further, the cryptocurrencies have fees (e.g., Ethereum gas fees) that are not centrally regulated.

So, let’s go online and buy some Canadian Dollars!!!

Takeoff, hockey hoser.   (Sorry, my Canadian speak is limited to having seen Strange Brew in College.)  Few problems here.   Foremost, the CBDC doesn’t exist yet.   This has been spoken about for several years, but things got a good push from the pandemic when people not enamored of the idea of leaving home.  Public discussions began in mid-2023 and thousands of Canadians participated.

So, what are the pros and cons of CBDC in Canada?

There are potential good points to the CBDC and potential bad points.   It would serve us well to look at each.

Pros	Explanation	Cons	Explanation
Safety	The CBDC would be protected by the government.	Privacy concerns	If all of your transactions are discoverable,  people become precisely targeted
Stability	The CBDC would always have a stable value.	Cost and Complexity	To use the CBDC, a whole new infrastructure needs to be installed.   This is quite expensive to do.
Accessibility	The CBDC would be of help to the unbanked or underbanked communities of the nation.	Potential Vulnerability	Anything digital is hackable, so using the CBDC is vulnerable.

So, what is the philosophy behind the CBDC for Canadians?

1.   With the digital loonie, no extra identification would be needed for basic transactions.

2.   If the digital dollars are lost or stolen, extra identification can be provided and transactions easily unwound.

3.    A digital dollar should help people to participate more in the economy.     The degree to which a locality is unbanked or underbanked would no longer matter.

4.   The CBDC would complement bank notes, not replace them.   So, for citizens who like dealing in cash, nothing has to change.

• “In an ideal world, it is truly digital,” says Henry Kim, Professor of Operations Management and Information Systems at the Schulich School of Business, York University located in Toronto. “It acts just like cash. But it’s digital, which means it’s convenient, and it transcends distances.”

Might this actually work?

I argue that it might.  It would appear that the Canadian government is working with the Media Lab at MIT to figure out just how to roll out this change to add the CBDC.  Given that the Lab has a specific division looking at digital currencies, it seems to be a great place to start to get information.   More importantly, it would seem that Canadians are becoming more comfortable about digital cash.   In evidence of this, in 2008, there were 880 million ATM transactions and in 2019, there were only  466 million transactions.   Ostensibly, the remainder had already shifted to credit card or some sort of digital cash.

The Verdict

It seems that the Canadians are very excited about this.   More importantly though, I think, it seems that the Canadian government officials are making this decision very deliberately.  They seem to be responding to the demands of their citizens, and on the way to get there, they are following the wise advice of people who have thought through it all before.  It shall be interesting to see what happens.

REFERENCES

CBDC Canada: What Is It? – NerdWallet

Digital Canadian Dollar – Bank of Canada

Is a Central Bank Digital Currency Coming for Canadians? – NerdWallet

Bank of Canada collaborating with MIT on CBDC research (cointelegraph.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.