Bank of Canada: Digital currencies raise stability questions

Financial stability is a key talking point within central banks as they discuss the possibility of launching digital currencies.

“The one thing I would pick up on is the importance of making sure that we don’t cause unnecessary disruption in the financial system. If we do choose to introduce the central bank digital currencies, it has to be done in a way that doesn’t cause financial stability problems,” said Scott Hendry, senior director of financial technology, Bank of Canada (BoC) during a panel yesterday at Sibos.

“We don’t see a need to replace the private sector in terms of payments or replace them certainly in terms of savings or bank accounts. We don’t want to become the bank for everyone at a retail level, so we need to make sure that the two-tier system that we currently have in terms of the offering of financial services is maintained. That we don’t cause a disintermediation of the private sector.”

On October 5, the BoC published a paper highlighting security risks surrounding CBDCs. According to Hendry, the private sector is superior to central banks at handling anti-money laundering (AML) and know your customer (KYC) protocols.

“It would be logical to have some sort of [CBDC] where the private sector plays at least that role, to help with the onboarding of customers and the transfer of value in and out of the system … There’s a big role there, and we’ve spent a lot more time looking at the high level, public policy drivers and some of the basics of the technology and there’s a lot of work left to be done on the business model.

“Figuring out what the central banks does, what the private sector does – this is one of the main goals of our external consultation process right now, to gather input from financial intermediaries who might at some point play a role in a CBDC system.”

Changchun Mu, director of digital currency institute, People’s Bank of China said an electronic Yuan Renminbi (eCNY) – formerly known as a digital currency electronic payment (DCEP) – would operate in tandem with the private sector as a hybrid legal tender.

“The two-tier account structure will not be changed and we’re not going to create competition with commercial banks,” he said on the panel.

The function of an eCNY would be to safeguard China’s monetary solvency as retail players such as WeChat Pay and Alipay continue to scale, said Mu.

“They are both private sector and provide such a significantly important public rules of financial infrastructure to the general public. All of those private sectors definitely have their own life cycle and they may experience outages in some cases … So in order to provide a backup for the retail payments system, the central bank has to step up and be prepared for if any kind of bad thing happens to those private sectors, either in the future or because of financial distress or technical distress.”

The private sector is supportive of CBDCs’ ability to assist in cross-border payments, but cautious of them being considered a panacea said Frantz Teissedre, head of interbank relations, Societe Generale on the panel.

“Central bank digital currencies can definitely help international payments to be faster and cheaper, but as it’s been said earlier I think we shouldn’t believe that alone it will be the universal cure for our cross border payment frictions,” he said.

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