By
Tolu Ajiboye
April 17th, 2024
An economic and crypto researcher at the Canada’s central bank says that the existence of CBDCs could provide better flexibility in creating monetary policies.
Banking institutions from around the globe and other financial agencies have been largely promoting the idea of Central Bank-backed Digital Currencies (CBDCs). Off lately we have been seeing a lot of countries and their central banks mulling out options to work on CBDCs which operate under the regulatory purview of the respective countries.
Recently, a central bank researcher for the Bank of Canada – S. Mohammad R. Davoodalhosseini said that a central bank-issued digital currency can prove to be economically fruitful to the country along with its neighbor, the United States, with which Canada shares a very good equation on economic aspects.
The researcher in his latest report titled “Central Bank Digital Currency and Monetary Policy” notes that introducing a 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.”
In his report, Davoodalhosseini mentions that one of the key questions for central banks is whether their fiat cash currency and central bank-issued digital currencies (CBDCs) can co-exist together, and, if at all they can, how should they work on an “optimal” policy.
To back his claims of the advantages of CBDCs, the researcher also presents his study with mathematical modeling and calculations wherein the researcher argues that a country’s economic welfare could be much better by substituting cash with digital currencies, provided the cost of implementation and infrastructure doesn’t go to high. He wrote:
“Having both cash and CBDC available to agents (consumers) 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.”
Davoodalhosseini’s study also notes that the existence of CBDC will help central bank attain a higher level of flexibility in adjusting the existing monetary policy. It says that “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.”
This report comes just within a few days of Europen Union presenting its study where it notes that arrival of central bank-issued digital currencies could help in reshaping the entire crypto industry thereby setting a new level of competition that could possibly mean the end of popular digital currencies like Bitcoin and Ethereum. It said:
“The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors. A potential inadequacy of traditional competition policy to address competition issues in the cryptocurrency markets can be found, suggesting direct public participation through a central-bank digital currency as a remedy.”
All in all, given the current maturing character of crypto markets, it remains to be seen how the central banks would restructure their policies in the coming years.