Emerging payment policy: Central bank digital currency and Payments Canada role

This article is the first in a series that explores emerging topics in payment policy. Each explains key policy issues and considerations, as well as Payments Canada’s current and potential future role within them.

The 2022 Federal Budget addressed the digitalization of money in an effort to help maintain the integrity of the financial system, promote fair competition and protect the finances of Canadians and our national security. The government announced its intention to launch a legislative review on the digitization of money, and the potential need for a central bank digital currency, otherwise known as CBDC.

Today, the Bank of Canada, which serves as Canada’s central bank, is building the capability to issue a digital version of the Canadian dollar, for potential future use should the need arise, that Canadians can trust and rely on. Payments Canada is supportive of the Bank of Canada’s analysis in terms of potential implications to the national payment systems and rules. The Government of Canada will ultimately make the decision as to whether or not to introduce CBDC into the Canadian economy.

What is CBDC?
CBDC is digital money issued by a country’s central bank. The Bank of Canada serves as Canada’s central bank and is responsible for issuing our physical currency. CBDC would hold the same value as physical currency, but would be issued in digital form.

Important to note is that because the Bank of Canada would issue CBDC, it would be a central bank liability, as opposed to a commercial bank liability. For clarity, liabilities are items that the bank owes to someone else, an example of a commercial bank liability would be a bank deposit.

What does this mean for Payments Canada?
As owner and operator of Canada’s national payment systems, Payments Canada is researching what role it can play should the Bank of Canada decide to proceed with CBDC. In particular, could the Real-Time Rail (RTR) payment system be leveraged for a CBDC and what impact would the launch of digital currency have on existing payment streams?

Unlike most other countries where the central bank is responsible for operating the real-time gross settlement systems, the Bank of Canada has relied on Payments Canada, an independent public purpose organization, to operate Canada’s payment infrastructure. This is an important distinction to make because if the Bank of Canada decides to issue a CBDC, Payments Canada could have a role in assessing, leveraging and allowing the use of payment systems, such as the RTR to support a CBDC or infrastructure design.

Key policy considerations for Canada and Payments Canada:

• Financial and monetary stability: A CBDC has to complement existing money and payment systems. The possible adverse impact of a CBDC on bank funding and financial intermediation, including the potential for destabilization of central bank money, has been a concern for central banks. How does Payments Canada collaborate with regulatory bodies in ensuring the financial stability of the Canadian economy?
• Privacy: Protecting consumer privacy is critical. Canada’s CBDC would need to allow for an appropriate balance between safeguarding the privacy rights of Canadians while also monitoring transactions to deter criminal activity. Is there a role for Payments Canada in ensuring privacy and reporting on criminal activity?
• Distribution model: Access to money is essential for participation in the economy and must be readily available to everyone. It’s expected that the private sector would offer accounts or digital ‘wallets’ to facilitate the management of CBDC holdings and payments. As the operator of Canada's national payment systems with many regulated entity participants, is there potential for Payments Canada to fulfill an operational role in the distribution of a CBDC?
• Resilience: Money has to be available all the time, regardless of circumstances. Could Payments Canada’s systems (current and future) be used to facilitate CBDC on a 24/7/365 basis?
• Liability: Given the potential for actors to involve themselves in the deployment and operation of a CBDC, a sound liability framework would be required that balances end-user protection with the safety and soundness of the ecosystem.
• Consumer recourse: In the unlikely event that something goes wrong, there must be measures and processes in place to ensure end-users have the ability to seek redress. In accordance with our legislated mandate, Payments Canada must consider the impact on users. This means we need to determine whether or not there would be a need for recourse rules.

As Payments Canada continues to examine issues and a potential role within CBDC, it will be important to consider Payments Canada’s public policy objectives. These include the continued promotion of safety, soundness and efficiency of our payment systems while making the interests of end-users a priority.

The CBDC project is expected to pick up in the upcoming years and many new developments will arise. Payments Canada’s policy and research teams will continue to work collaboratively to understand the impacts of CBDC in Canada.

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