Central bank digital currencies could be necessary for digital innovation and competition, Bank of Canada says

• Central bank digital currencies may be needed to maintain digital competition, Bank of Canada says.
• CBDC adoption would also boost innovation and increase welfare, the bank said in a research note.
• Central banks in the US, the EU, China and elsewhere are researching or trialling CBDCs.

Central bank digital currencies (CBDCs) could be necessary to ensure innovation and competition in digital economies, the Bank of Canada said in a research paper published on Tuesday.

As the economy becomes more and more digital, several issues have emerged that could be addressed through CBDCs. These include problems linked to competition in sectors like payment options, a resulting lack of innovation and development or exploration of new technologies, and an increased risk of market power abuse by large financial bodies as cash becomes less relevant in society.

Introducing a CBDC could address these issues in a more effective way than regulations and policies would, according to the Bank of Canada.

"In general, a CBDC as a basic outside option for payments could discipline the market," the paper said. "Further, as a competition tool, a CBDC might be simpler than developing new competition policies in the complex and changing environment of big tech, and simpler than attempting enforcement via lengthy and uncertain legal battles," it continued.

CBDCs could also make the use and further development of technologies like smart contracts and programmable money easier as their framework could be made available for public use and therefore create common ground for innovation.

Finally, CBDCs could also protect and even boost welfare levels, according to the Bank of Canada. The potential emergence of new markets and applications could increase welfare, while the added protection of consumers against market power abuses would prevent welfare from declining, the report said.

The Bank of Canada has not yet decided whether to pursue the development of a CBDC, and is currently in the process of researching and assessing its options.

The US is at a similar point in the process of potentially creating a digital dollar. Earlier this year, Federal Reserve Chair Jerome Powell said the central bank was still exploring the potential of a CBDC and would publish a report this summer. Last week, the European Central Bank also said it was launching a two-year exploration into a possible digital euro.

Elsewhere, CBDCs are at more advanced stages - China for example has started trialling the digital yuan in various cities and is now using the collected data to make adjustments. The country has also said that international visitors might be able to use the CBDC during the 2022 Winter Olympic games in Beijing.