Bitcoin emerged as an alternative currency in 2009 out of the ashes of the financial crisis the year before. The now-famous cryptocurrency boasted a series of benefits that the traditional financial system did not have. Among these were security, transparency, and, most importantly, decentralization.
The decentralization would ensure that records of financial transactions were kept safe from manipulation and fraud. Therefore, it is quite understandable that a lot of cryptocurrency enthusiasts are wary of anyone bringing up the subject of centralizing cryptocurrency. After all, decentralization is, pardon the pun, central to the entire concept of cryptocurrency. This has not stopped the Bank of Canada from floating about the idea of a centralized cryptocurrency.
Bank of Canada releases a working paper
The Bank of Canada has recently released a working paper in which they argue for the incorporation of a centralized cryptocurrency vouched for by the banks. The authors behind the paper acknowledge that cryptocurrencies will inevitably be part of our economic future. Therefore, they write, it would be wise for the existing financial institutions to embrace the concept, rather than trying to fight it. The cryptocurrency industry is quite simply too lucrative for banks to be able to afford to stay out of it. Furthermore, the Bank of Canada’s research reveals that the overall economy could benefit substantially from utilizing cryptocurrency.
Central bank digital currency could boost the economy
One of the main authors of the paper, Mohammad Davoodalhosseini, explains the economic benefits of introducing what he calls a central bank digital currency (CBDC). His forecast shows that consumption in Canada would go up 0.64% with the introduction of CBDC. The benefits would be even more tangible in the United States, where the introduction of CBDC would lead to an increase of 1.6% in consumption. Davoodalhosseini goes on to note that too many banks are currently wasting time considering their options. One of the reasons they are apprehensive is because they do not see a way for fiat money and cryptocurrencies to coexist.
Can fiat money and cryptocurrencies co-exist?
The concerns of the banks are unfounded, according to the paper published by the Bank of Canada. In fact, the paper argues that the reality is quite the opposite. Not only does fiat money and cryptocurrencies already coexist, but there could be wider societal benefits if the banks embraced both forms of currency. One of the key arguments is that by implementing CBDC, banks will be able to stay competitive in the future financial market. Another argument put forward is that the implementation of CBDC would not even be very expensive. Finally, the economic welfare of the country using CBDC would improve considerably.
The future lies with CBDC
Davoodalhosseini concludes the paper with some suggestions for how banks can best implement CBDC, and why it is important. If only fiat money or CBDC is available, it automatically places restrictions on people’s ability to conduct business. This, in turn, would have a negative impact on the general economy. With CDBC, the central banks would be able to accommodate the wishes of their clients to trade in cryptocurrencies. Whether or not the paper will sway the current financial institutions remains to be seen.