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CMB MAGAZINE cmba-achc.ca winter 2018 | 33 digi-dollars FEATURES OF THE HYPOTHETICAL CBDC AND TRANSITION e white paper describes a hypothetical CBDC that resembles physical currency as closely as possible, through which the supposed benefits of a CBDC can be measured. In particular, the CBDC would be: n supplied by the BoC, which would not charge fees for using it; n accessible on a non-exclusive basis via private digital wallets on a variety of devices; n subject to the same anti-money laundering and know-your-client measures used by banks with respect to cash transactions; n anonymous, provided the CBDC does not earn interest (the potential benefits of the CBDC change significantly if the CBDC pays interest — we discuss both options below); and n exchangeable on par, among other things. e availability or cost of the technology that would be required to implement the hypothetical CBDC is not considered in the white paper. In the long term, CBDC would likely be less expensive than a physical currency by reducing production and storage costs, but in the short term, the start-up costs associated with acquiring and maintaining the new technology would significantly impact the potential benefit of introducing a CBDC. e white paper's analysis is also premised on complete elimination of physical currency, whereas in reality, the transition would likely take place in phases and over time to mitigate any growing pains. POTENTIAL BENEFITS e white paper considers six potential benefits and whether such benefits justify moving to a CBDC. Most are dismissed outright for "not provid[ing] a compelling motivation to issue CBDC." Arguably the most persuasive benefits are those that relate to reducing costs by eliminating production and storage costs of physical currency and forcing other actors to reduce fees to compete. In particular, the white paper considers: Increasing Contestability in Payments e white paper explores whether a CBDC could improve contestability and efficiency relative to other forms of payments. Identifying this as the most plausible potential benefits, the white paper considers increased contestability from the perspective of day-to-day retail transactions and the large-value payment system, as well as the impact on the benefits if the CBDC earns interest. From a retail perspective, a CBDC would certainly add to the competition among e-transfers, debit and credit cards. However, Canadians already have options for low-cost payments and a non-interest earning CBDC would not likely change consumer behaviour on this basis alone. e CBDC could facilitate transactions that are currently foregone because of frictions and limitations of existing systems. For example, smaller merchants that feel burdened by the transaction costs of accepting premium credit cards may choose to accept the CBDC and stop accepting certain credit cards. As well, consumers who avoid using e-transfers or credit cards online due to privacy or security concerns may find the CBDC to be a good alternative. Credit card issuers have been able to compete with lower-cost forms of payment in the past, such as debit cards and cash, by offering benefit and rewards programs for cardholders. If the CBDC were to pay interest, the CBDC might become a credible competitor for credit and debit card issuers. From the perspective of large-value payments, the CBDC could facilitate open access to the payments system such that any payment agent would be able to settle its payments with finality and in real-time. As part of that autonomy, agents would also have to pre-fund their payment needs and obtain liquidity support and overdra protection from their banks. is approach is consistent with recent recommendations from the Competition Bureau to reduce barriers formed by the payment system infrastructure. However, the security and efficiency of the existing settlement system, which features a liquidity-saving settlement queuing system and the BoC's overdra protection, make it unlikely in the BoC's eyes that a CBDC would compete with the existing payment system. If the CBDC were interest-bearing, contestability would likely further increase as more people shi away from forms of payments that apply fees. However, the white paper speculates that any gains in contestability in the long term, cBdc would likely be less expensive than a physical currency . . . but in the short term, the start-up costs would significantly impact the potential benefit . . .

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