The world of traditional finance is increasingly embracing the use of digital currencies, raising the question of whether the future of money is completely digital. The surge in popularity of Bitcoin and other aspiring ‘mega-stablecoins’ — such as Facebook’s Diem, formerly known as Libra — suggests that this is a possibility, prompting central banks around the world to design digital currencies of their own. 

The Bank of Canada (BoC) is at the forefront of the research on Central Bank Digital Currencies (CBDCs) and recently announced that it is designing a contingency plan for a Central Bank Digital Loonie (CBDL). To that end, the BoC solicited academic proposals to research and submit a CBDC design, and a team of U of T and York researchers was one of the top three finalists selected.

The team included Andreas Veneris, a professor in the Department of Electrical and Computer Engineering, and Andreas Park, an associate professor of finance at UTM and the Rotman School of Management.

They sat down with The Varsity to discuss how your loonies might soon be transferred out of your pocket and onto the cloud.

Crash course to CBDCs

The BoC has been contemplating the design of a CBDC as a protective measure against technologies that challenge bank-based payments and monetary policy transmission mechanisms. 

“Very briefly, that is either if the use of cash goes away… or if a different private or international cryptocurrency… becomes a major means of payment that threatens to take over,” Park said.

“A CBDC [is] a digital representation of cash, which just lives on a digital ledger,” he explained. Although the blockchain technology that underpins CBDCs bears similarities to Bitcoin and other cryptocurrencies, it is different in nature. 

“The [CBDL] would be equivalent to the Canadian dollar, and it will be very unlikely that there will be any flat price fluctuations,” he continued. 

“There is no speculation… one [digital] Canadian dollar is backed by the reserves in the [BoC]… Bitcoin is backed by those people who are willing to pay… to buy it,” clarified Veneris. “It’s completely different.” 

The future of money

As the U of T and York team proposed, users would obtain a CBDL e-wallet from an app store for use on their smartphones, tablets, and computers. They would need to register the wallet online or through a provincial government service with the Narrow Bank, a separate legal institution that manages CBDL transfers. 

E-wallets would be offered through Google, Samsung, and Apple devices or through government websites. CBDL transfers would be enabled by a PIN or biometric permissions — similar to credit card merchant terminals today — and by using quick reference (QR) code, near-field communication, or Interac-style emailing and text messaging.

When asked about the future of money, Veneris and Park both believe that digital currencies will dominate the financial realm. 

“The future of money is… going to be entirely digital,” said Park. “It’s going to live on a common infrastructure of some form. You will have the ability to transfer money back and forth instantaneously… You will have the ability to do programmable money, so you can use your money shifted to particular investments to use it in the Internet of Things payment methods.”

Ethical implications 

If the future of money really is digital, there is growing concern over digital currencies being harmful for underprivileged people with little to no access to CBDC technology. It may also pose privacy issues to users. 

“When [the BoC] announced the competition, inclusion [was] a particularly important aspect of the design,” said Veneris. 

The research proposal highlights the importance of creating a CBDL that promotes financial inclusion and welfare while safeguarding Canada’s socioeconomic sovereignty in the Internet of Things era. Additionally, one of the BoC’s objectives is to ensure that bank notes remain available to people who wish to use them. 

When it comes to privacy issues, the BoC’s centralized platform promises to establish digital cash with a user-authentication protocol that safeguards users’ privacy and data. 

“The last thing you want is, through this digital medium, [for] the several banks, the government, let alone the private corporations, [to] become a surveillance state,” argued Veneris.