BoC takes another step in digital currency research, partnering with MIT

The Bank of Canada announced Wednesday an agreement to collaborate with the Massachusetts Institute of Technology (MIT) on a 12-month research project on central bank digital currencies.

The agreement comes a week after U.S. President Joe Biden signed an executive order on the responsible development of digital assets, which asked the Federal Reserve to examine whether it should create its own digital currency.

The BoC will work with the MIT Media Lab’s digital currency initiative team to study how advanced technologies could impact the prospective design of a central bank digital currency (CBDC).

“This exploration will help inform the Bank of Canada’s research effort into CBDC,” the central bank stated in a Wednesday press release.

In 2020, the BoC published a background note about its official position on a CBDC pertaining to public policy, design, technology and risk management issues the central bank was considering as it builds out its capacity to issue a digital currency if the need arises.

The note stated that the BoC would consider launching a digital currency if the use of cash declined to the point where Canadians no longer had the option of using it in various transactions, and if one or more alternative digital currencies were to become ubiquitously used as an alternative to the Canadian dollar in terms of payment.

Neither criteria has been met, according to Ryan Clements, assistant professor at the University of Calgary’s faculty of law. His areas of research include financial technology, blockchain and cryptoassets.

When it comes to the U.S. executive order, Clements said it appears as though the Biden administration is placing importance on the potential development and rollout of a CBDC, but is lacking specifics.

“There’s a measure of urgency that the Biden administration has placed on financial agencies to assess the technological infrastructure and to increase research and development, and prioritize the potential development and deployment of the CBDC,” he said. “But what the executive order doesn’t provide is any details. And I would argue that all of the devil is in the details.”

The order directs the Treasury secretary and others to report to Biden on the future of money and payment systems within 180 days.

Among the details that are lacking are what accessibility to a CBDC could look like and how it will work, how potential use of a CBDC could ensure privacy, and what a CBDC infrastructure system will look like, Clements noted. According to Payments Canada, one of the pivotal design attributes for a retail CBDC is the nature of the infrastructure used to hold and update user ledgers (centralized, distributed, or hybrid) and how it will maintain resilience across different payment use cases.

Clements noted some of the fundamental questions for the Bank of Canada surrounding digital currency. If the central bank were to issue a CBDC, does that mean a consumer can bank and deposit funds with the central bank? Would the BoC be providing Canadians an analogous account to what a commercial bank provides them? If so, how does that affect the depository base and credit generation for commercial banks?

“These are questions that we’re not a 100% certain of,” Clements said.

“If we do have [a CBDC], I believe it’s going to be integrated into the commercial banking system in a way that doesn’t materially, adversely affect the depository base of the commercial banks. Because if you adversely affect the deposit base, then you impact the amount of credit in society, in the system.”

Clements said those in the wealth management space may have the following questions about CBDCs: Do they allow an advisor to move money more easily into a client’s brokerage account? Would the advisor be able to convert Canadian dollars to American dollars at a cheaper rate? Would advisors be able to do cross-border money transfers faster?

“Those are the pieces that need to be more clearly articulated,” he said, notably how a CBDC would actually play out in day-to-day lives. “We don’t have clear signals on that yet.”