2018, in Canada, People preferred cash for only 1 out of 3 transactions. In many countries, the percentage is even lower.
The trend of paying direct cash is changing, as online stores and other e-stores encourage cashless payments. Ultimately, this is where digital currencies play their role.
What is digital currency
Digital currency is a currency that is available in digital form. The term become more know since Bitcoin emerged in 2008. Digital Currency It can be either centralized or a decentralized network, where they can be transferred from one person to another without the intermediation of a bank.
In summary, cryptocurrencies are digital currencies that are based on cryptography – a method of converting data into complex codes to ensure that only those who have access to the encryption key can access the content.
Another feature is its blockchain, there is no single or central server “taking care” of processes or transactions. All users who own digital currencies can refer to the blockchain to identify the transaction in a trustless form .
Its transmission happens between peers. This means that it is the personal computers of each user that carries out the transactions directly with the computer at the other end. There is no hierarchy or even institutions regulating or controlling transactions.
Regarding security, digital currencies typically use cryptography and blockchain technology to ensure that transactions take place smoothly on the internet.
Both the identities of the owners and the transactions are encrypted and registered in the blockchain, ensuring that there is no fraud with fake digital currencies or that they do not belong to the owner who makes the transaction.
Which countries are using digital currency
Research shows there are at least 111 states where Bitcoin and cryptocurrencies are perceived by law and are legitimate.
For example, significant nations like the United States and Canada hold a by and large crypto-accommodating demeanor towards cryptocurrencies while likewise attempting to implement anti-money laundering and illegal tax avoidance laws and forestall extortion.
In the interim, in the European Union, the part states are not permitted to dispatch their own cryptocurrencies, yet crypto trades are urged to be authorized and consent to the guidelines.
As of January 2020, the most Bitcoin-friendly nations where BTC is legitimate are:
- Hong Kong
- The Netherlands
- The United Kingdom
Canada stance of digital currency
Deputy governor, Timothy Lane, during a speech in Montreal said there are no encouraging cases yet that would move the central bank to issue its own digital currency now.
Although, the timeline is there and the Bank of Canada is planning a counter-event in case the Canadian dollar is no longer favoured.
The bank could issue its own digital currency provided that other central banks or private digital currencies are widely used in Canada to allow the bank of Canada to manage monetary policy.
The bank of Canada has been researching the economical and technological impacts of digital currencies for about six-years, and lately stable coins. There are a lot of aspects for a bank to consider before planning a decision. And since there are indications of planning going underway, perhaps we could see an announcement in the future.
Should the bank have their own digital currency
Given the rise of bitcoins and other cryptocurrencies, it has caught the attention of financial regulators and central banks.
Bank-issued cryptocurrency will play a major role in a digital and cashless society. It will help define the economical future of a country and since it plays its part in the economy of a country, then there will be major risks for a bank to consider before issuing its digital currency.
The two papers of Bank of Canada of 2017 and July 2018 indicates the limitation to
Financial institutions in the form of settlement or reserves, which is noteworthy.
The reason BOC researchers are considering central-bank digital currency is that they “fear less seigniorage revenue if people drop Canadian dollars”. Seigniorage is revenue made by the government by issuing currency, especially the difference between the face value of coins and their production costs.
Digital currencies aren’t the issue. Or maybe, the thought of centralized crypto or digital currencies constrained by state establishments is an ironic expression. By definition, a dispersed record (blockchain) requires distributed ledger and accord components, something contrary to monopoly
The problem is that the Bank of Canada and the Receiver General could miss the under-handed tax. Moves to keep up this assessment are bare, self-serving attacks on competition.
The boundary of obstacles is large and tough, the bank of Canada could see negative interest rates and drops.
A well-developed country like China which is taking cautious steps before issuing the currency is an example to learn from. And the most recent example of the Venezuelan regime and its petro, which failed largely before releasing.
If issued without thorough research, and considering the issues present in the country, the bank of Canada could see its days numbered.
Important challenges along the way
There would be a few obstacles to consider on the way to a central bank digital currency. For instance, individuals could choose to keep a lot of their cash in the central bank digital currency as opposed to in a standard bank account.
Challenges aren’t limited to the cash-only, there are also aspects that a bank has to cover, for example, trust factor: not everyone is tech-savvy and may not be able to accept this major revolution, which can slow down the initiative of digital currency.
Some of them are:
- The decentralized validation process is inefficient and slow
- Financial stability and financial intermediaries
- Countering new digital currencies
- International implications
- Central bank balance sheet and credit allocation
A central bank digital currency would make it simpler and quicker to move cash out of commercial banks. So these frameworks wide runs could, in principle, become speedier and increasingly frequent. It could end up in a circumstance where a central bank digital currency, rather than making the money related framework increasingly steady, makes it less so.
Fortunately, runs on the whole banking framework are very uncommon in present-day times. Truth be told, Canada has never had one.
There might be another problem, though: A CBDC could risk the run on the banking system. It means that people may want to withdraw the money they possess from all commercial banks, with a possibility that they don’t know which banks are healthy and which ones are in trouble.
However, banks hold just a small amount of the all-out estimation, so they regularly can’t pay everybody simultaneously.
There are risks, some that are counter-able and some not. The best advisable thing would be to wait and watch how the CBDC works out in other countries, how are they planning to counter the challenges and what more could be done before moving towards a central bank digital currency. It is better to be behind than rush ahead and fail.
And in the meantime, research.