CBDCs’ Relevance Questioned After Canada Casts Skepticism

It’s a widely reported data point that 93% of central banks are in at least some stage of deploying — or at least exploring — central bank digital currencies (CBDCs).

But a Thursday (Aug. 10) report from the Bank of Canada, the Canadian central bank, seems to raise questions about just where — and perhaps whether — the digital currencies fit within commerce and financial services.

One of the key objectives is to deploy CBDCs to broaden financial inclusion and individual consumers’ access to financial services, but the report contended there are few reasons for the CBDCs to be out there.

“For a payment-oriented CBDC to successfully address unmet payment needs, the main consumer groups — who already have access to a range of payment options — would have to widely adopt the CBDC and use it at scale,” the Bank of Canada posited.

And that may be a tall order, considering that there’s already a high degree of connectivity (and use) of traditional banking products and services. The report noted that 98% of Canadian adults have a bank account. A full 87% of individuals also have a credit card. Access to the internet runs high, and consumers already use technology to conduct daily financial activities.

And in a cashless economy — where coins and bills would be shouldered aside for CBDCs — the impact would be a negative one.

“Some people strongly depend on cash to make payments and to manage finances more generally, with little or no use of debit and credit cards or eTransfer,” according to the report, which estimated the population that relies solely on cash is about 5% of consumers, while other consumers are technology averse.

All in all, as the central bank stated, “consumers face few payment gaps or frictions and therefore might have relatively weak incentives to adopt and — especially — to use CBDC at scale. If that were the case, widespread merchant acceptance also would be unlikely.”

If consumer response is tepid, and merchant acceptance is muted, there’s a vicious cycle that develops, where neither side is budging nor spurring the other to be more enthusiastic about CBDCs.

Some Areas of Promise?

If domestic retail use cases may not materialize, there’s at least the possibility that CBDCs may find some footing in cross-border use cases. Wholesale CBDCs — where commercial payments are a feature of cross-border trade — may be valuable.

Elsewhere, the nonprofit Digital Dollar Project (DDP) said last week in a white paper that it had completed a pilot study that tested the feasibility of cross-border remittances CBDCs.

In reference to the mechanics of the pilot, the paper noted that the CBDCs were simulated to traverse the U.S.-to-Philippines corridor and were issued to Western Union, acting as a customer of BDO Unibank.

“The pilot demonstrated that rather than displacing the service offerings of Western Union and BDO Unibank, CBDCs present an opportunity to modernize processes and promote efficiencies for private-sector companies and their customers,” the DDP wrote, underpinned by distributed ledger technology (DLT).