Canada, along with the US and Britain should be at the forefront of the crypto explosion, and in a new working paper that was recently published in Central Bank Digital Currency and Monetary Policy, the Bank of Canada is leading the campaign for a central bank cryptocurrency.The paper argues that the economic growth and future well-being of a nation such as Canada or the US could be safeguarded by the implementation of a central bank cryptocurrency. Substituting cash with a CBDC is not costly, and could improve the country’s economic welfare.

Non-technical summary of new working paper of Bank of Canada – Digital Currency and Monetary Policy Working Paper

Many central banks are contemplating whether to issue central bank digital currency (CBDC). If they do, CBDC will co-exist with other means of payment, including cash. On one hand, CBDC has certain potential benefits, including the possibility that it can bear interest. On the other hand, cash may be preferred by agents over CBDC, perhaps because they can remain anonymous in transactions by using cash. Interactions between cash and CBDC have not been well understood in the literature. I put together a model in which cash and CBDC co-exist, and agents with heterogeneous transaction needs can choose their portfolios with varying mixtures of each. Using this model, I investigate how monetary policy is affected by the introduction of CBDC, and study the circumstances under which its use is desirable. I show that CBDC provides more flexibility for the central bank to conduct monetary policy. 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.

Having both cash and CBDC available to agents 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. When the availability of both cash and CBDC results in higher welfare than in the above-mentioned cases, optimal cash inflation is strictly positive, and agents endogenously use cash in small-value transactions and CBDC in large-value transactions. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.

Abstract “Many central banks are contemplating whether to issue a central bank digital currency (CBDC). CBDC has certain potential benefits, including the possibility that it can bear interest. However, using CBDC is costly for agents, perhaps because they lose their anonymity when using CBDC instead of cash. I study optimal monetary policy when only cash, only CBDC, or both cash and CBDC are available to agents. If the cost of using CBDC is not too high, more efficient allocations can be implemented by using CBDC than with cash, and the first best can be achieved. Having both cash and CBDC available may result in lower welfare than in cases where only cash or only CBDC is available. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.”

Mohammad R. Davoodalhosseini from the Bank of Canada said in the report that central bank digital currency (CBDC) “can lead to an increase of up to 0.64 percent in consumption for Canada and up to 1.6 percent for the US, compared with their respective economies if only cash is used.”