What has happened?
According to a researcher at the Bank of Canada, introducing central bank digital currency (CBDC) could bring economic benefits for Canada and the US.
What does this mean?
In a staff working paper, researcher Mohammad Davoodalhosseini wrote that introducing central bank-issued cryptocurrency "can lead to an increase of up to 0.64% in consumption for Canada and up to 1.6% for the US, compared with their respective economies if only cash is used".
Davoodalhosseini said that many central banks are currently contemplating introducing a CBDC.
For example, Sweden wants to decide soon whether to issue an "e-krona" and some officials at the bank of China have also expressed a wish to create their own digital currency as a way to support the digital economy.
Some of the key questions these banks face include whether to eliminate cash or whether cash and a form of CBDC should co-exist, and if so, what is the best way to maintain an "optimal monetary policy".
Further, using CBDC is costly for agents, "perhaps because they lose their anonymity when using CBDC instead of cash".
The researcher said that he studied several options: cash only; CBDC only; or both cash and CBDC being available to consumers.
Based on his modelling and mathematical calculations, Davoodalhosseini said that a country's economic welfare – at least for Canada and the US – might be better off by substituting cash with a CBDC, provided implementation is not too costly.
"Having both cash and CBDC available to agents (consumers) sometimes results in lower welfare than in cases where only cash or only CBDC is available. This fact suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce CBDC is to improve monetary policy effectiveness."
The paper also stated that introducing a CBDC provides more flexibility for central banks to conduct current monetary.
"This is because the central bank can monitor agents' portfolios of CBDC and can cross-subsidize between different types of agents, but these actions are not possible if agents use cash."
If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.
Receive free news and analysis – written by Hogan Lovells' world-leading legal teams and tailored to your preferences – by registering on Engage. You can also access our cutting-edge interactive Lawtech tools, designed to help you make better decisions and save time and money.
You can also keep track of all the Engage content by following our LinkedIn page.