Bank of Canada Researches Central bank-issued Cryptocurrencies

Bank of Canada researches central bank-issued cryptocurrencies, thus analyzing their potential benefits. In addition, the working paper examines the cases of coexistence of the central bank-issued cryptocurrencies and fiat currencies.

30 July, AtoZ Markets – A researcher with the bank of Canada, S. Mohammad R. Davoodalhosseini, has published a working paper where he looked into the central bank-issued digital currencies. He specifically examined how these currencies can improve the economy. 

Bank of Canada Researches Central bank-issued Cryptocurrencies

The working paper assesses the potential benefits of the central bank-issued digital currencies. The researcher has examined the state of CBDCs and concluded the paper with an offer to study the coexistence of a CBDC and fiat currencies. 

Davoodalhosseini has noted in his paper:

“There has been a great deal of discussion in recent years about the effects of introducing [CBDCs] into economies and whether cash should be eliminated.” 

He further provides examples of China and Sweden as countries that are planning the issuance of their own CBDCs. Concerning this matter, Davoodalhosseini states:

“Should central banks eliminate cash from circulation? What would be the optimal (i.e., welfare-maximizing) monetary policy if agents [consumers] can choose between cash and CBDC? And quantitatively, what are the welfare gains of introducing CBDC into the economy?”

Can CBDC and fiat coexist?

In order to answer these questions, Davoodalhosseini has presented a model where both fiat and CBDC currencies are available to consumers. He has compared the environment to the cash-only and CBDC-only systems. As per Davoodalhosseini, each of these schemes would eventually present a different result. 

In a CDBC-only environment, more allocations and the ability to earn nonlinear interest would be enabled. However, there would be a loss in economic welfare caused by the costs that are associated with carrying a CBDC. 

In the scenario, where both cash and CBDC are available to the public, the situation is a bit complicated. Davoodalhosseini has stressed that a CBDC would set “a constraint” for achieving an optimal monetary policy. In case such constraint was not flexible enough, “then the central bank would prefer to have only one means of payment used by” consumers, either fiat or a CBDC. 

In case this constraint was somewhat lenient, “then the central bank would have both cash and CBDC circulating in the economy.”

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