Transcript of The PayPod: Episode 15 - Current state of central bank digital currencies

Several central banks around the world, including the Bank of Canada, are a exploring central bank digital currency (CBDC). There are many benefits a CBDC could bring to an economy, however, there are complexities and uncertainties as well. What considerations are being made by central banks AND governments prior to the creation of a digital currency? What are the complexities and risks with introducing a CBDC? The Paypod host Cyrielle Chiron is joined by Rod Garratt, Pellish Chair in Economics, University of California Santa Barbara, and Francisco Rivadeneyra, PhD, Director, CBDC & FinTech Policy, Funds Management and Banking, Bank of Canada, to discuss the current thinking around CBDCs.

Guests: 

Transcript: 

Cyrielle Chiron:
It's been called the most important trend in payments, with many countries beginning to consider Central Bank digital currencies, also called CBDC. Many Central Banks are already within the research phase of implementation, including the Bank of Canada, which announced earlier in 2020 that it was setting the foundation so that we could move quickly should the need of a CBDC become more evident.

Cyrielle Chiron:
Canada has been investigating digital currencies for some time now. For example, Project Jasper, a joint research initiative, launched in 2016 with Payments Canada, the Bank of Canada and all their partners. Started with looking at distributed ledger of technology and through its faces and partnerships, culminated with the Bank of Canada successfully using a CBDC in a test payment with the Singapore Central Bank.

Cyrielle Chiron:
The world is now looking at money and payments through the lens of CBDCs and if progress continues as it currently is, CBDC will undoubtedly shift our industry and economy. I'm Cyrielle Chiron, your host of the PayPod, which talks about all aspects of Canada's ambitious payments with modernization mission, and explores the topics that influence payments in Canada and around the world.

Cyrielle Chiron:
Like cryptocurrencies and e-Cash, CBDC is a form of digital currency. This innovation brings many benefits, but what are the possible negative impacts? Joining me today to discuss this and more are two leading CBDC experts, Rod Garratt, an internationally recognized economics expert and currently the Pellish Chair in Economics at the University of California, Santa Barbara, and Francisco Rivadeneyra, Director of CBDC and Fintech Policy, Funds Management and Banking at the Bank of Canada. Welcome, and thank you both for joining me today on the PayPod.

Rod Garratt:
Thank you for having us.

Francisco Rivadeneyra:
Thank you. It's great to be here.

Cyrielle Chiron:
Today's episode is about, I believe, the most popular world in payment these days, CBDC. I think if we ran analytics in the payments world, if it's even possible, it is mentioned as often as COVID-19. I'm very pleased to have this conversation today with the two of you. I don't know if we have enough time, actually, to cover everything, though. I have so many questions. I will try to not overload the two of you too much because this is really interesting.

Cyrielle Chiron:
Let's start maybe by creating a picture a bit. We've all heard of Libra and Bitcoins and other cryptocurrency like type of cousins, but I'd like to start off by asking you to explain to our audience briefly, what is a Central Bank digital currency and why is this such a prominent topic now. Maybe we can start off with you, Rod.

Rod Garratt:
Yes, thank you. Perhaps the best way to answer this is to build out the concepts you just mentioned. Bitcoin is a privately issued form of digital currency. Privately issued means there's no government behind it and digital means that it only exists in computers; there are no physical Bitcoins. An inherent feature of Bitcoin is that its supply does not adjust to economic conditions. That is, there is no one acting to stabilize it. Hence, its value tends to be quite volatile.

Rod Garratt:
A number of people thought that a good way to capture some of the benefits of Bitcoin without the price volatility was to link the value of the digital coin to a sovereign currency. That, put very simply, is the idea behind stable coins, of which Libra is the leading example. Ultimately, someone who owns a privately issued stable coin does not own the associated, sovereign currency; they own Libra or Tether, or whatever coin we might be talking about. In that sense, they still face risk associated with the fluctuation of the value of the stable coin relative to the sovereign currency.

Rod Garratt:
Central Banks, in contrast, can issue digital coins that always have the same value as the sovereign currency because they are sovereign currency. That's one idea of a CBDC. You can think of it as a perfectly stable coin.

Rod Garratt:
I'm talking here about a form of CBDC that would be related to the examples you gave, that is Bitcoin and Libra. This would be, for lack of a better word, a tokenized form of digital money that could be transacted on digitalized platforms which are often referred to as DLT or distributed ledger technology platforms, but the term CBDC could also be thought of as what would happen if the Central Bank simply allowed individuals, the public, to have conventional private accounts at the Central Bank. We could think that consumers could have a savings account, a checking account, or a Central Bank account.

Rod Garratt:
This idea that consumers might be allowed to have accounts at the Central Bank is not a new one, and this idea was contemplated long before Bitcoin came along, but so far, Central Banks have not seen a good reason to do this. But times are changing.

Cyrielle Chiron:
It's good to have your view on this, Francisco, thinking about a Central Bank point of view. I know you are representing your own views today and not the one from the Bank of Canada, but since you are part of a Central Bank, I think your experience is important here. Can you build up a little bit maybe on what Rod said, but also why are governments and Central Banks exploring the option of creating a CBDC and why today?

Francisco Rivadeneyra:
Thank you for giving me that intro, Cyrielle. Indeed, I have to say the opinions I will say today are my own and not necessarily the ones of the bank. Let me build on what Rod said, and probably bring a little bit of sympathies to what he said.

Francisco Rivadeneyra:
The way we think about a CBDC is as having three ingredients. First, it should be a direct liability of the Central Bank. Second, it should always be available to the public. Sometimes we call this universally accessible. Of course, it should be electronic. These three ingredients are essential.

Francisco Rivadeneyra:
What I mean with essential is that if you wouldn't have any of these three ingredients, you wouldn't have a CBDC. An example that may put the case of not being electronic then, if you have the first two being a direct liability and being universally accessible, you will have cash. That's why some people think of CBDC as electronic cash.

Francisco Rivadeneyra:
While these are the essential ingredients, you could have more features, depending on the public motivations to issue it, or the design. One of the big promises of digital money is that it could be programmable, meaning that payments or transactions could be contingent on conditions. Some people think this is one of the biggest promise of CBDC.

Francisco Rivadeneyra:
Let me get back to your question of why now. CBDC is prominent not just because there's been lots of technological advances in the last decade or two on cryptography and mobile computing, and these kind of technological advances have made possible for Central Banks to provide new forms of money, electronic directly to the public. At the same time, these technological advances have allowed the private sector to potentially bypass the core national system that either are regular for Central Banks or operated by them.

Francisco Rivadeneyra:
In other words, these technological advances present both a risk of Central Banks being out of the payments ecosystem, but also opportunities for Central Banks to provide its liability in electronic form to the public.

Rod Garratt:
One of the other interesting things is that since the increase in popularity of Bitcoin, people have been thinking about the underlying technology of Bitcoin and uses of distributive ledger technology, not just for payments but also for the tokenization of all kinds of assets, in particular securities. One of the big reasons why there's increased interest in CBDC is because if we have tokenized assets, then we would like to be able to transact these assets and have true DVP, that is delivery versus payment, on platforms for these assets. For that, we need to be able to pay for them in a form of money that is transactible in the same way as these tokenized securities.

Rod Garratt:
The industry interest in tokenizing assets is also one of the big reasons why there is increased demand for a tokenized form of Central Bank money.

Cyrielle Chiron:
That's a very good point. I'd like to stay with you, Rod. I appreciate this might be very hard to answer because I'm sure you're going to tell me, "Well, it depends on many things, like how it looks like, the parties involved, or the banking system of each country, or all of the above" that both of you just mentioned earlier, but let's try. How long does it take to implement a CBDC?

Rod Garratt:
How long it takes to implement a CBDC is really going to depend on what type of CBDC you're talking about. As I think we've touched on, there's really two visions for CBDC in terms of the form that the CBDC takes. One is this idea that a CBDC is an account that people are allowed to have at the Central Bank. Again, the idea that currently, people have bank accounts, but the money that is in those bank accounts are liabilities of commercial banks. Economists often refer to this as commercial bank money. But we could also allow people to have accounts at the Central Bank. This would be a Central Bank liability, which is distinct from the commercial bank deposits that consumers would have in the sense that they wouldn't be subject to any risk of default. That type of account could be offered quite quickly in terms of the technology. The technology is already there to give people these accounts.

Rod Garratt:
The difficulties in that regard would be, first of all, they'd be legal, so that in most countries, I think Canada included, there'd have to be a change in the back act in order for banks to be allowed to offer these accounts to the public. Currently, at least in the United States, only financial institutions are allowed to have accounts at the Central Bank. That type of technology is there. There's a lot of details that would have to be sorted out. Who would be the KYC, know your customer? How these accounts would be onboarded. Lots of organizational issues. The technology is there.

Rod Garratt:
The other concept of the CBDC, as I eluded to when you were introducing the notion of things like Bitcoin, this is a different type of animal in the sense that this would be a coin that is transacted in a different way, a decentralized way. A coin that exists on these distributed ledger platforms, which is quite a different operational model than the conventional centralized bank account.

Rod Garratt:
That type of technology would take much longer to implement in the sense that the technology is still relatively new. The Central Bank would have to choose a way to do this. They'd have to resolve a whole bunch of issues regarding scalability, security, and that would take considerably more time if the Central Bank decided they would want to go that way, but there's a lot of interest in that. As Francisco mentioned earlier, when we think about concepts like programmable money, that is thinking about the idea that money could have enhanced features, then many of these aspects would come to play if we thought about money that was offered on these types of distributed ledger platforms. Platforms that allow for things like smart contracts. People have probably heard this word. This is the idea that you could actually restrict the way that money is used. You could have money be allocated automatically. Things like interest on deposit accounts could be distributed automatically. There's lots of benefits to introducing money on these new platforms, but that type of world is still a ways away from the Central Bank perspective.

Francisco Rivadeneyra:
If you allow me to chime in on this-

Cyrielle Chiron:
Yes, I was going to ask you, can you jump in on this and maybe provide us the view on CBDC in Canada and if you have a timeframe for this.

Francisco Rivadeneyra:
Yeah, that's a very important question. Indeed, it has an aspect of technology which Rod just elaborated on, but I think the most important aspect is when would the government provide that support to the Bank of Canada to issue one. The way the Bank of Canada has articulated this in the speech of the Deputy Governor Tim Lane in February was that Canada does not need a CBDC now, but we cannot wait to have the need to start thinking about it.

Francisco Rivadeneyra:
The position of the bank is that we're working on contingency planning if and when the bank needs to issue one with the support of the government. It's basically an aspect of policy questions. It's under which scenario would we think we need to issue one? In that speech, Deputy Governor Tim Lane proposed two scenarios, one of which is if Canadians start using private digital currencies that start threatening the use of the Canadian dollar as a unit of account, basically using, for example, digital [inaudible] or US dollar, that would really threaten our monetary sovereignty and that would have onward problems for implementing monetary policy and banking regulations. That would be one scenario in which there would be a strong motivation to issue CBDC.

Francisco Rivadeneyra:
But also, another aspect in which we actually see a steady trend is this appearance of cash at the point of sale. Canadians are using cash less and less at the point of sale and they're substituting with other things. Some payments all denominate in Canadian dollars, but these would all potentially be a scenario in which there would be a motivation to issue CBDC because providing a digital liability of the Central Bank would provide access to Central Bank money to Canadians. Those would be the two scenarios.

Francisco Rivadeneyra:
Going back to the horizon of that, then we need to be preparing in terms of the economic and technological research, but we wouldn't decide to issue one until those scenarios have potentially materialized and are actually threatening our monetary sovereignty, competition, and some other aspects.

Cyrielle Chiron:
That's a good point. I agree with you. You can't wait for this to happen. You need to explore different scenarios so that we are ready for when this is going to be into place. I'd like to stay with you, Francisco, a little bit more. Your academic research was published recently and it focuses on the implications of CBDC and other technological innovations for the main mandate of Central Banks. Can you tell us about your findings on this report?

Francisco Rivadeneyra:
The bank has put out a tremendous amount of research looking at the technology side as well as the economics and banking and monetary policy implications of CBDC, but I'll just mention one small piece of research that we've been looking on in a paper with Charlie Cannon and Russell Wong. We're looking at the consumer side of digital currencies and thinking how end users would interact with them from the point of view of the risk and convenience of digital currencies.

Francisco Rivadeneyra:
We are of course interested in this because if we're going to decide on CBDC or regulate some private digital currencies using Canada, we need to put ourselves in the shoes of users. What we're trying to look at is, to evaluate the trait of that users, we have between, for example, holding a large value of digital currency secured by a private key and therefore subject to loss, with the convenience of that privacy. How do customers evaluate their ability to hold balances in a secure and private way with the hurdle or the cumbersome need of remembering passwords or product keys or having to secure those. These might be really important if we issue a Central Bank currency. We have to think of how would customers manage those balances.

Francisco Rivadeneyra:
Our thinking is that there may be an ecosystem that might spring from the fact that people need to securely manage these balances, maybe in wallets or in some cases, users will deposit those balances with some custodian that will have to manage the risk of loss. In a sense, we think that eventually we will have that ecosystem that might resemble very closely the current system we have today in which at some point, some user might decide to deposit those balances and exchange that for a commercial bank deposit. We're looking at those trade-offs.

Cyrielle Chiron:
What would be the benefits for a consumer to have a CBDC?

Francisco Rivadeneyra:
A big aspect of that would be privacy and Rod has been looking at this aspect very carefully, but also at the system level, it would be to provide a competitive alternative to private means of payment. For example, cash today provides that outside option to the use of debit. CBDC would provide that alternative outside option if a particular user does not want to have a debit or use credit in a transaction. That would be two of the main aspects from the point of view of users would benefit them, privacy and more options.

Cyrielle Chiron:
Right. Thank you. Rod, I'd like your view on this. Maybe we can talk a little bit about the uncertainties associated with implementing a CBDC. Then I have to questions here. One would be, what would you say are some of the risks and implications with bringing a CBDC overall, and my second question would be, what would be the hesitancy towards it, if any? I'm thinking about everyone here. Francisco mentioned consumers. Do you see any hesitancy from consumer, businesses, or maybe even banks in general?

Rod Garratt:
Sure, thank you. There are lots of risks. There are operational risks, there are security risks, there is AML, CFT risks, and so on. Fundamentally, the thing is that it has to work. The standard for Central Banks is much higher than fintech startup. If a fintech startup proposes something and it doesn't work, then they just move on to the next thing, but, of course, a Central Bank can't behave that way. A new system would have to meet all the standards for resiliency, security outlined in the principles for financial market infrastructures, and these cover a wide array of issues that cover direct and indirect participants on the platform.

Rod Garratt:
There are lots of risks in that sense that the Central Bank would have to be very comfortable with before they moved forward, and that's just on the technology side. There are some financial stability risks that a lot of people in the academic world have been writing about, things like flight to quality, if you create this perfectly safe asset. There's monetary policy risks. But there are also potential benefits on these fronts. As always, there's a benefit-risk trade-off, but Central Banks don't generally assess those trade-offs in a balanced way. They tend to worry about the risk, as well they should.

Rod Garratt:
In terms of hesitancy, the idea here I think is that I think people should always think in terms of the Central Bank mandate. What is the Central Bank mandate? The Central Bank mandate is to ensure safe, efficient, and accessible payments. In fulfilling that mandate, Central Banks can play two roles. They can play the role of operator; that is, they can operate a system, introduce a system, and run it. Or they can be a regulator/supervisor, and they can assist in the private sector's ability to provide payment services.

Rod Garratt:
In the case of CBDC, as in the case of many types of situations where Central Banks are involved, they have to assess what role they should play. In Canada, for example, there is a very well functioning payment system, the retail payment system. The commercial banks do a very, very good job. The commercial banks, it's a solid system, so there's very little risk between deposit insurance and bailing policies of the Central Bank that protect commercial banks. There's very little risk in commercial deposits; I would argue virtually none in Canada. One has to think about what the reasons are.

Rod Garratt:
The reasons I think primarily come to do with, as I said, going back to fulfilling that mandate, and is there some form of payment that the Central Bank can and should provide that no one else is able to provide. This, in a way, brings us back to cash. One of the interesting things about cash is that cash is declining. People are using cash for payments less and less, and this trend has been accelerated of course by the recent COVID pandemic because cash is a physical object that you have to touch and transfer. There's a lot of interest in contactless payments. Just the changing landscape, the reduction in cash use, certainly raises the question that if cash, something that's provided by the Central Banks, is no longer going to be used by the public, should they provide a substitute for cash, as Francisco said earlier, an electronic substitute. That, I think, is one of the things that Central Banks have to contemplate.

Rod Garratt:
Again, just summarizing, the hesitancy comes from the fact that the Central Bank, in its mandate, which is to provide safe, efficient, and accessible payments, has to decide whether or not this is something that they need to do.

Cyrielle Chiron:
Right. I agree. We've been seeing cash decline globally, and in Canada it's declined like 40% in the last five years, so it is definitely going in that trend, and COVID did accelerate that, too. Francisco, do you want to weigh in here, to have the point of view of if you look at those risks? I know you are. Do you want to add something here?

Francisco Rivadeneyra:
Thank you, Cyrielle. I think I'll talk along the way Rod put it. From the point of view of the Central Bank mandate, Central Bank mandates tend to be, across the world and in the case of Canada it is to ensure financial stability, price stability, efficient and safe payment systems, as well as currency. The way Central Banks look at it and particularly in Canada is if you look at the marketplace and if there's nothing majorly wrong with either your financial system or the way to conduct monetary policy or the cash system, or the payment system, it's a hard part to cross. You have to make a very good argument for which you would want to take any of these risks in addition to there's many unknowns in these new technologies. You don't know the cybersecurity risk. That's a big area of concern. But at the same time, you don't know how issuing CBDC might in fact affect the makeup of the financial system. Maybe lots of deposits, commercial bank deposits flow into CBDC, and that might be something that we want to consider very carefully. That's just to give two examples.

Francisco Rivadeneyra:
The hesitancy, I would say, just careful consideration, always with the lens of our public policy objectives and mandates.

Cyrielle Chiron:
I'd like to ask you something else, to both of you. Some countries like China have appeared to be much further along than others when it comes to deploying CBDC. I'd like to have both of your opinions here. Where does Canada and other leading world economies stand in comparison, and what can Canada learn from those which have more things?

Rod Garratt:
I think that's a great question. It raises the fact that it's important to remember that different countries have very different needs and motives. If we think about the percentage of the population that is banked, or the type of technologies that exist, or the level of cash use, as we were just touching on, these differ drastically across countries, so the need for alternative payment sources can be very different, but that doesn't necessarily mean that the Central Bank has to step in with the CBDC.

Rod Garratt:
Going back to what I said earlier about the role of the Central Bank that is sometimes that of operator and sometimes that of regulator/supervisor. A very good example to think about is the situation with payments in some African countries. For example, in Kenya, there was a problem with using cash and a mobile phone company, Safari Comm, introduced this mobile payment app called Empeza. Empeza became very popular and its use far exceeded things like Bitcoin, which got a lot more attention in some circles.

Rod Garratt:
What the Central Bank did there, is that they had never seen something like this before. They didn't really have a regulatory framework for it, but they work closely with Safari Comm, they recognized that this was a beneficial form of payment, and they made it work. They worked with Safari Comm and made it work. In situations like that, private sector responses were very beneficial, and the Central Bank more or less played a supportive role; I think they actually became part owner at some point, but more or less played a supporting role.

Rod Garratt:
In other places, there are still the not good technological solution. One of the big issues is where are you starting from. What type of payment system platforms are already in place? In places where the current payment infrastructure is not serving the public's needs, there is a much greater incentive to move on implementing and experimenting with these new technologies. It really differs.

Rod Garratt:
China, of course, is another good example where their reasons to become involved in payments might be a little different than the reasons of others. That's a system where there's two large mobile payment providers, Alipay and WeChat Pay that completely dominate the payments industry. The Central Bank is involved with those payment systems and the Central Bank digital currency that they are proposing and could launch imminently will be integrated with those systems. It really depends a lot on the country and what the circumstances are.

Cyrielle Chiron:
I think you're right. Everything depends on where you start. Both of you mentioned earlier, it's like what is the situation in the stocks, what is the current systems in place so that everything will defer from that. Francisco, I know the Bank of Canada is working alongside other Central Banks. Maybe you can tell us a little bit more about this?

Francisco Rivadeneyra:
Yep. If I can, can I chime in on the question of China and the race to deploy CBDC.

Cyrielle Chiron:
Sure.

Francisco Rivadeneyra:
This is important because how do we perceive the work going in different jurisdictions. Indeed, China has been in the news and it seems that it's imminent, the issuance of their own CBDC, but I would caution against framing this as a race to be the first one. Being the first one might deliver certain advantages, for example, capturing some latent demand for an international electronic means of payment. That might be some benefit. But, as Rod already mentioned before, there's considerable reputational issues.

Francisco Rivadeneyra:
If Central Bank issued CBDC and it does not get adopted widely, or if it's implemented poorly, the risks could actually spill over to the very important aspect of conducting monetary policy, for example, or if you issue CBDC and the financial system responds in an unforeseen way, which could effect financial stability. Being the first mover just for the sake of it, I don't think that's the right way to think about it. Also, as I also mentioned before, is the cybersecurity issues need to be addressed fully before going ahead with this.

Francisco Rivadeneyra:
At the same time, I would say that the bank is one of the leading Central Banks in CBDC. Although we might not have seen as imminent to issue CBDC, the amount of research we've done started in 2013, so long before this was in people's radar. We started with economic research and we also experimented with the technology itself, and of course, Payments Canada and Rod were a big part of the Jasper Experiments. This continues today with other experiments and we're cooperating with many Central Banks, international organizations, trying to give our input to steer the global regulatory agenda.

Francisco Rivadeneyra:
Just to summarize on this point, not being the first mover I think would allow the bank to learn from the experience of others, potentially saving some kind of cost and risk. As I said before, we should issue when our domestic circumstances warrant it.

Cyrielle Chiron:
Yeah. Totally, I agree with you. I would like to build out on that. You talked a bit about international aspects. We looked at CBDC, more in a domestic payments, but what about international space? If we are building something, is there any global standout that we need to fill in now that a lot of us are creating it, are thinking about it?

Francisco Rivadeneyra:
That's a very good question. Interoperability right now one of the key areas of debate among Central Banks, and in fact there was just a report from the CPMI, the Committee on Payments and Marketing Infrastructures, that was just released this week, in fact. It addresses the issues of cross-border payments, remittances, and interoperability. There's a brief mention on CBDC. It is that CBDC could be helpful for helping interoperability for cross-border payments or possibly remittances, but it really remains to be seen because this will depend on other bigger conversations that have to be had in terms of what you mentioned standards, or even legal aspects. For interoperability of different systems, you might have to have a legal recognition of liability and different ledgers of different Central Banks. These are just early stages of those conversations.

Francisco Rivadeneyra:
There's a lot of conversations. This is one of the areas of discussion in the CBDC coalition, in which the Bank of Canada is part of. But also I think many of these discussions, how to make cross-border payments more efficient, will need the cooperation of the private sectors because most of the friction in making cross-border payments comes from access, messaging standards, barriers to entry; many aspects that are not only in the wheelhouse of Central Bank.

Cyrielle Chiron:
Yeah. That's true. Rod, I'd like to go back into cash. We're talking about cash declining and we're not arguing this. We'd like to have your opinion on this. As an economist, what is your view on CBDC replacing cash entirely over time, and do you even see it as being a real possibility at some point in the near future?

Rod Garratt:
In some sense, it seems inevitable that at some point paper cash will disappear, but I think that point is still quite a long way away. In particular, it's because as we move towards introducing new payment alternatives, either the Central Bank or new payment alternatives that are offered by the private sector, they can coexist. There's a case for physical cash to exist for a long time, even if its use diminishes greatly.

Rod Garratt:
It's important to remember that there is a tipping point at which cash use tends to not be viable. If you think about the way businesses operate, if they want to deal with cash, then they have to deal with depositing funds at the bank, they have to have change available at the start of the day. Cash is just a complex ... not a complex thing, but it takes work to accept cash when you have these very quick and efficient electronic alternatives.

Rod Garratt:
At some point, if cash use declines to a certain level, then businesses will stop wanting to deal with it. If businesses stop wanting to deal with it, even if there's a fraction of the population that would like to use cash, they won't be able to. This becomes problematic because there are some segments of the population that are not as equipped or capable of using digital payment methods as others. A roll of the Central Bank is to ensure that all sections of the population are adequately served.

Rod Garratt:
These issues become complicated, and these are issues that Central Banks have to grapple with, but they suggest that cash will be around for a long time. It can die a slow death, so to speak. I think that's probably what will happen.

Cyrielle Chiron:
It's a good point, because you talked about some people who are still using cash or Connexis are just not comfortable, and I agree, in Canada we're a very highly banked population. There's also this question of end banked overhaul. But the other question I have is about the fact that it is electronic and cash is offline, so what do you do if there is a storm or something and you don't have electricity or access to digital? How would that work?

Rod Garratt:
I think probably Francisco should answer that, because I know that the Bank of Canada is working on devices that could address exactly those problems.

Cyrielle Chiron:
Francisco, over to you.

Francisco Rivadeneyra:
Yeah, thank you. Indeed, I think that's one of the most important use cases, the one of universal access and offline payments. In certain instances, they're the same use case. At least in the case of Canada, a remote community. They use cash because it is offline and bank notes are easy to recognize, hard to counterfeit. But how do you do that with an electronic device that might need power or might need connectivity?

Francisco Rivadeneyra:
In fact, the question of offline electronic payments is one of the hardest questions there is in the whole CBDC agenda. Maybe we don't have to get the use case perfectly in the sense that it can be limited to certain amount of value and limited for certain amount of time in which you eventually need to reconnect to the network, but I think a lot of people are thinking about this. While we don't have yet an answer, the way to implement that solution of universal access might be, as Rod said before, some kind of complementarity of cash and the digital version of it.

Francisco Rivadeneyra:
The bank has that dual purpose, as stated in that speech of Tim Lane, that we'll support cash for as long as Canadians demand it. But at the same time, we're thinking seriously of what would the introduction of CBDC would do to cash demand. We're thinking of how to balance those two objectives.

Cyrielle Chiron:
Yeah. Not an easy agenda. I'd like to stay with you, Francisco, and talk about another piece of research that was issued. This goes back into all the things we're talking about, actually. Whether banks should issue eMoney, like CBDC, and we're talking about addressing competition problems within the banking sector, as you mentioned previously. How would CBDCs impact Central Bank's relationship with commercial banks, and also maybe private cryptocurrency companies like Libra, from a competency perspective. We talked about you can have a bank account with the Bank of Canada or you can not have a bank account with the Bank of Canada, so how do you see this relationship?

Francisco Rivadeneyra:
That's a bit of research that we put a couple years ago with Charlie Cannon and Russell Wong. They would look at a wide range of motivations that mainly Central Banks had put forward. As I said before, you can bundle them in price stability, financial stability, payment systems, and currency. Always the question is can CBDC help Central Banks deliver on these mandates.

Francisco Rivadeneyra:
After looking, at least on the part of monetary policy, we thought that it would be hard to improve the conduct of monetary policy, in particular some authors have thought of using CBDC to implement negative interest rates, but there are so many other hurdles to be able to implement negative interest rate before you actually use it, say, in times of a deep recession. You would have to remove cash. That's counter to one of our mandates, which is to provide currency to the public.

Francisco Rivadeneyra:
On financial stability, and depending on how you implement CBDC, it could really change the industrial organization, the make-up of the financial system. For example, changing the funding model of commercial banks. That's not something the bank wants to do. The bank doesn't want to rattle or shake the tree. The way we think about it is CBDC should be implemented to do no harm, just improve upon what we have currently.

Francisco Rivadeneyra:
There's quite a bit to do on research in terms of how would it effect the banking sector, but I think the aspect that probably we have a bit more intuition about is payment systems and competition. CBDC would be a new form of Central Bank money and would compete with other means of payments like debit and credit to a certain extent. The way we think about it is the CBDC would be helping in addressing improving the competitiveness of the markets for means of payment. It would help in creating more competition, providing that universally accessible means of payment, and to continue to provide that outside option that cash provides today.

Francisco Rivadeneyra:
If cash usage really continues to decline, CBDC would enter that fray to continue to provide that kind of stability in the market for the means of payment.

Rod Garratt:
I'd like to add to that. Francisco touched on privacy, and privacy is an area that I've done a fair bit of work on. Privacy is one of the important issues because as payments become almost entirely digital and as cash disappears, then suddenly there is no way to make a payment and preserve your privacy. This is an issue that comes to the attention of Central Banks and comes to the attention of the public in general.

Rod Garratt:
One of the things that a CBDC could potentially provide is a form of privacy in payments. It's important to understand that privacy doesn't mean anonymity. Privacy doesn't necessarily mean that the Central Bank doesn't know who you are, but it means that you'd have the ability to make a payment in private, without at least the private sector or the corporate sector knowing what you're doing. There could be good things and bad things behind that.

Rod Garratt:
One thing that private sector can do with your payment information is they can potentially use it to price discriminate against you, and in fact, it's a much deeper problem than that, as I demonstrate in a Bank of Canada working paper with Maarten van Oordt, which is if you fail to protect your privacy and payments, then the information that the retailer can use, they can use that to price discriminate against others that are like you, that have observable characteristics similar to you. There's this whole public good aspect to privacy that's being threatened by the disappearance of cash.

Rod Garratt:
In a sense, the Central Bank is important because the Central Bank has no incentive, at least no commercial incentive, to do anything with your private data. Christine Lagarde, she made this statement that Central Banks can provide one thing in payments that the private sector could not, and that's privacy in payments. What she means by that is that the government would know and the Central Bank would know, but the private sector doesn't. At least from my perspective, I think that's fine.

Rod Garratt:
First of all, the Central Bank having your payments stated, they're not exactly the same thing as the government. They don't have to use this information or look at this information, and they certainly have no incentive to share it. They have no profit motive to share it.

Rod Garratt:
I'll say one more thing on this, which is that perhaps the first CBDC was something called Dinero Electronico, which was a mobile payment system that was developed in Ecuador that allowed people to make payments that were denominated in what was essentially the Central Bank money, which was the US dollar, because that country was dollarized. If you looked at the way that system was designed, the information on who was transacting payments was available but it wasn't readily available. You would have to go in and actually extract the data in order to find out what sort of individual people were doing in payments, and there's no incentive for the operator to do that.

Cyrielle Chiron:
That's a great point. The privacy and anonymity, it's like another important aspect to think about and data is another big conversation, it's everywhere, and privacy, it's very important.

Cyrielle Chiron:
Before we end today, I wanted to get your views on the conversations around CBDC increasing since the start of the pandemic. What impact do you think the economy recovery will have for countries who were already exploring a CBDC prior to the COVID-19 outbreak, and how could a CBDC either help during the recovery or have helped if one was already in place?

Rod Garratt:
One of the things that was instantly recognized shortly after countries were dealing with COVID-19 was that countries started introducing policies that were designed to help alleviate some of the economic stress that was caused. With particular the United States, we had something called the CARES act, which was intended to provide up to $1,200 for adults whose individual income was below a certain level. This led to the question of how do you get that money into the people's hands.

Rod Garratt:
Under existing structures, that's possible, but many people raised the idea that if we had a CBDC, which would allow the central government, essentially, to directly deposit money into people's accounts, then this type of program could have been implemented much more quickly and been much more effective. That would be one example.

Cyrielle Chiron:
What about you, Francisco?

Francisco Rivadeneyra:
Exactly, I was about to say that. The key question is would CBDC have been the tool to implement government transfer more quickly. Indeed, it could be done under certain designs, but I would caution against thinking that CBDC would be the perfect solution for this.

Francisco Rivadeneyra:
Let me split that in two parts. First, to highlight that fact that in Canada the CRB was actually distributed quite fast, and I know from conversations between the banks, the government, and Payments Canada, it was implemented quite fast. Basically, people pulled the money from the CRB by connecting their bank account to the government agency that was distributing the money. That's on one part, showing there is ways of making these connections between people's identity and people's bank account.

Francisco Rivadeneyra:
The reason that whatever the method of transfer, to be able to transfer government support, you need identity of the target population. That is harder than it sounds, even if the transfer is universal, because you might have people who are registering twice or you might not have everyone join the system. I think that's the challenge. If CBDC is not equally to one person, one account in the system, then this misses the purpose.

Francisco Rivadeneyra:
With respect to COVID-19, my sense is that the pandemic will accelerate the trends of digitization in the economy from usage of e-commerce to the use of different means of payment. So the long view is that cash use might continue decreasing, but in the short term, there's a bit of a debate on the effects of cash. So some of our colleagues in the currency department conducted a survey on the usage of means of payment during the pandemic. And the key conclusion there was that while there was some media awareness of some merchants refusing cash during the lockdown in March and a bit of April, few Canadians found that as a challenge, meaning few Canadians tried to play with it cash, and we're not able to do so. So that's an important thing to keep in mind, especially because our data on the bank note distribution system shows that cash withdrawals have in fact increased. Of course, that's for the store value motive, not for the transaction. So this is just to qualify the speed at which we think cash will disappear as a means of payment.

Cyrielle Chiron:
Well, that's all the time we have for today. I'd like to thank you. I do have so many more questions, but we have to end at some point. That was very clear from our conversation that it is very topical and interesting topic and it's what I believe everybody is talking about these days. I'd really like to thank you both for your time and expertise today.

Rod Garratt:
Thank you.

Francisco Rivadeneyra:
Thank you, Cyrielle.

Cyrielle Chiron:
Central Bank Digital Currencies will change the future of payments. With new digital currencies popping up online every day, regulators are beginning to change the way they think about money, and Central Banks are serious about creating their own. As the Bank of Canada and federal government explore the pros and cons of bringing in a CBDC in Canada, it is clear there is much to consider.

Cyrielle Chiron:
While there are some enticing benefits associated with such an innovation, the risks and uncertainties would also be considered prior to such a significant change in the economy taking place. I'd like to once again thank Rod Garratt and Francisco Rivadeneyra for speaking with us today.

Cyrielle Chiron:
As always, the PayPod is available for download on your favorite purchase app or Payments.ca. Join the conversation online using #onlinepayments, and stay tuned as we continue to explore the changing world of payments. Thanks again, and see you next time.