Central Bank Digital Currency (CBDC) in Canada: Opportunity or Threat to the Banking System?


Central Bank Digital Currency (CBDC) – Threat or Opportunity for the Banking System?

A study conducted by the Bank of Canada analyzed the potential implications of introducing a central bank digital currency (CBDC) on the country’s banking system. The results of the analysis, titled “Central Bank Digital Currency and Banking Choices,” were authored by economists Jiaqi Li, Andrew Usher, and Yu Zhu.

CBDC and Banking Products

According to the study, CBDC could pose a serious threat to commercial banks only if it offered customers interest rates and services such as mortgages. Financial institutions, however, will remain attractive to customers because they offer a wide range of diverse financial products, which has been appreciated by Canadians.

Canadian Preferences

Canadians value their banks, primarily for the credit-related products they offer, such as mortgages and credit cards. These services are a crucial factor for them when choosing a financial institution.

CBDC Potential

The study revealed that CBDC without interest and additional financial products, as well as without physical service locations like bank branches, would attract only 1% of bank deposits. Conversely, utilizing commercial bank branches and locations of Canada Post would make the central bank digital currency more appealing to society.

Challenges for CBDC

The central bank is attempting feasibility tests and outreach efforts regarding a potential digital dollar, aiming to persuade citizens about this innovative idea. However, the majority of Canadians lack trust in CBDC, primarily due to concerns about financial privacy, which poses a significant challenge to the potential implementation of a digital currency.

It’s worth noting that even with a high transaction limit, e.g. 25,000 CAD (18,590 USD), the share of liquidity held in CBDC could see a substantial decrease. The final decision on the central bank digital currency in Canada remains open, but there are various perspectives and potential benefits and challenges associated with it.