Central Bank Digital Loonie: Canadian Cash for a New Global Economy

Abstract

Global economic digitization continues to advance at exponential speed. This development is in sharp contrast to the financial sector and payment systems that still operate on legacy infrastructure that lacks the flexibility to serve those technology needs. Further, the emergence of Decentralized Finance demonstrates the capacity to disrupt the financial sector, impact national sovereignty, and affect established monetary transmission channels. Hence, it is no surprise that nation-states and tech-firms alike are now building new digital infrastructures that circumvent the legacy practices. Central banks, in particular, are racing to explore the issuance of Central Bank-issued Digital Currencies (CBDCs) in an attempt to rediscover the very essence and use of fiat cash. In the past decade, the Bank of Canada (BoC) has emerged as an international thought leader on CBDCs. In early 2020, the BoC issued a contingency plan for the potential introduction of a CBDC and later that spring ran a global competition among universities to sample arm length’s designs. Being a finalist in this competition, this manuscript presents a design proposal for a Central Bank Digital Loonie (CBDL) based on careful academic research of the possible technological, legal, and economic components of such an unprecedented and historic expedition. We propose a two-phased approach. In the first phase, the BoC introduces a centralized platform as a public-good infrastructure that establishes digital cash and ensures global/domestic interoperability. In this phase, e-KYC-based authentication leverages existing private/public sector solutions but also safeguards users' privacy/data against third-party commercial interests while complying with AML/CFT. In the second phase, the BoC will expand the platform to an enterprise-level permissioned blockchain. This shared resource will transform CBDLs into programmable e-money within a “social operating system” that will enable Canadians to operate, innovate, compete, and thrive in this new global digital economy.