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digi-dollars 34 | winter 2018 cmba-achc.ca CMB MAGAZINE would be marginal. Especially in the case of large-value payments, the efficiencies of the existing system would offset any interest earned on CBDC. Ensuring Adequate Central Bank Money for the Public and Preserving Central Bank Seigniorage Revenue A decline in demand for physical currency would threaten the BoC's revenue from seigniorage, the profit made by the BoC from the volume of physical currency in circulation. e profit is a function of the interest earned on the volume of physical currency in circulation, less the costs of producing and distributing the physical currency. As the volume of physical currency used in Canada slowly declines, the BoC's seigniorage will also decline unless the BoC finds a new revenue stream, potentially in the form of a CBDC. e more closely a CBDC resembles physical currency, albeit with the convenience and low cost of being in digital form, the more likely the CBDC would be able to supplement the role once served by physical currency for the BoC. e white paper believes some demand for cash will persist where people want security and privacy for their transactions. is might change if the CBDC earned interest because demand for the CBDC would likely greatly increase. But, paying interest would also reduce the seigniorage earned by the BoC. On the whole, the potential benefits of the CBDC for the BoC as a source of revenue are minimal. Reducing the Lower Bound on Interest Rates and Supporting Unconventional Monetary Policy, such as Quantitative Easing In recent months, there has been scrutiny regarding low interest rates in Canada and the impact on consumer behaviour and debt patterns. Putting aside whether reducing the effective lower bound on interest rates to spur demand is good monetary policy, the white paper considers whether issuing a CBDC would be necessary to do so. By holding cash, depositors and investors can avoid instruments with a negative interest rate. If physical currency is eliminated in lieu of CBDC, depositors and investors would have no choice but to continue to invest funds. Ultimately, the white paper decides that reducing the effective lower bound on interest rates can be achieved by reducing the number of large-value notes circulated, without necessitating introduction of a CBDC. A CBDC is also not the only way the BoC could distribute "helicopter money" directly to households and firms to support quantitative easing, but could make implementing such a measure easier. Overall, the white paper did not find these potential uses to be sufficient reasons to switch to a CBDC. Reducing Aggregate Risk and Improving Financial Stability To the extent that people rely on the CBDC as a means of payment and for storing value, the white paper takes the position that aggregate risk and financial stability would benefit because the CBDC would be "risk-free" compared to the current system of banks issuing claims in respect of deposits. It is also considered whether a shi away from depositing money with banks would damage financial stability. If the CBDC did not pay interest, a sudden mass switch away from bank deposits seems unlikely. However, if people could earn interest on CBDC, a rush to switch is much more likely, especially if banks cannot offer a competitive spread. e white paper is optimistic that banks will be able to compete with an interest-earning CBDC by offering creative products, raising rates and cutting costs. It acknowledges that in periods of stress or volatility people may switch to the CBDC, potentially prolonging disturbances in the financial system. Promoting Financial Inclusion e vast majority of Canadians report having a bank account and debit card, suggesting that financial inclusion and access to currency are not major issues in Canada relative to other countries. e white paper also points to other effective means of promoting financial inclusion that are being tried in other countries, concluding that this potential benefit of a CBDC is not sufficiently compelling on its own. Inhibiting Criminal Activity e white paper dismisses CBDC as an effective means to combat money laundering. Assuming the CBDC displaces physical currency, the reduction or elimination of large-denominated notes could inhibit some criminal activity. However, the "CBDC itself could also be well-suited for criminal activity if it were anonymous, as is cash." Should the CBDC be interest-bearing, it could not be fully anonymous, which might discourage people from using it for criminal activity. On the whole, the white paper identifies many potential benefits of a CBDC. In the BoC's view, none of those benefits are deemed adequately compelling — or perhaps the status of physical currency in Canada is not sufficiently dire — to warrant an immediate or complete move to a CBDC. Given the expected continuing decline of physical currency, it is almost certainly inevitable that a CBDC will one day displace cash, and this white paper indicates that many will stand to benefit from the transition. e fact that the BoC devoted its resources to this study, combined with increasing public interest in and acceptance of digital and cryptocurrencies, suggests that this transition could start sooner rather than later. Bio: As one of Canada's top business law firms, Blake, Cassels & Graydon LLP (Blakes) provides exceptional legal services to leading businesses in Canada and around the world. We focus on building long-term relationships with clients. We do this by staying true to our guiding principles and providing unparalleled client service and the highest standard of legal advice, always informed by the business context. Reprinted with permission of Blakes. Given the expected continuing decline of physical currency, it is almost certainly inevitable that a CBDC will one day displace cash.

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