Canada's central bank, the aptly named Bank of Canada (or Banque du Canada for our Québécois readers) (BOC) has released a set of comprehensive staff analytical notes considering the design, security, privacy and use of Central Bank Digital Currencies (CBDCs). Although the BOC has already announced that it is working on a prototype CBDC, these notes reveal more detail about how the BOC is approaching the CBDC problem.
The BOC has published the following analytical notes:
In their key note paper addressing CBDC adoption and usage, the BOC argue that to encourage adoption of a CBDC, the currency will likely need to be designed to incorporate or mimic cash's key advantages, which are identified as:
universal accessibility (everybody can use cash);
no intermediation fees at the point of transaction;
a high level of privacy; and
the capacity for offline transfers.
(our emphasis)
The note also considers the important of ensuring that any CBDC is designed with a strong network effect in mind, that ensures both merchants and users are net beneficiaries of using a CBDC as opposed to cash.
In particular:
both sides of the payment system must benefit from switching to the CBDC relative to the status quo to achieve smooth and sustained adoption and use.
On security, the BOC candidly states that:
Public DLTs do not fit the risk profile for a CBDC system.
This is primarily because use of a public DLT necessarily limits the control that a central bank can have control over new currency issuance or member participation in nodes processing transactions for whatever currency operates on that DLT. For that reason, the BOC considers that:
Permissioned DLTs ... are more amenable than public DLTs to a CBDC solution.
In their note on prioritising universal access of a CBDC, the BOC suggests that a viable CBDC ought to be "as accessible as cash". Notwithstanding that this may become an increasingly low bar, as cash use continues to plummet, we think the BOC is right to consider from the outset whether a CBDC can be as inclusive as cash. Of particular interest is the BOC's requirement that a CBDC:
should also support online and offline transactions
A permissioned DLT is far more likely to give central banks comfort that offline transactions will be able to defeat double spend problems which would otherwise be a problem. Bitcoin maximalists and libertarians will point to the ways this can be managed in a public system but these will never be palatable to a central bank.
The BOC acknowledges that privacy is a highly subjective concept, and that designing a CBDC policy requires consideration of various nuanced questions, including such matters as:
Whether all transactions should be routinely disclosed to the government, or only some (by, e.g., dollar threshold)?
Should law enforcement be able to determine a person’s holdings, even if only approximately?
Should a payer’s identity be hidden from a merchant?
What transaction details should be shown to a payer’s MSB?
Whether users should be able to transact outside of KYC regulations to some extent (again perhaps on a threshold level)?
As with most questions about privacy, asking 100 different people the above questions is likely to lead to 100 different answers.
The BOC diplomatically summarises the problem of privacy trade-offs with the following very Canadian polite understatement:
achieving high levels of privacy while complying with regulations is complicated.
Despite the challenge, it is fantastic to see our fellow Commonwealth cousins in Canada driving the CBDC project forward with these notes.