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An introduction to CBDC

(Central Bank Digital Currency)

Part III

'Central Bank Digital Loonie: Canadian Cash for a New Global Economy'

As noted earlier, the presenters at the Rotman CBDC forum all made a point of stating their proposals did not, in any way, threaten the 'intermediation of the banks.' This isn't quite true, and this is one of the more important contradictions in the Toronto/York paper as well:

'All in all, the functional/architectural role that we envision is that of a public utility that provides an infrastructure at cost.' 

Banks should be public utilities, but they're not; at least commercial banks  are not – they are private, for-profit businesses. The contradiction therefore, as stated in the introduction in the Toronto/York proposal:

'It enables the BoC to include CBDLs in their monetary policy mix and to gain seigniorage income via CBDL issuance. . .' 

Since money created (in an accounting sense) is a liability of the central bank (but the people's asset once in circulation), how does the 'CBDL' earn seigniorage income for the BoC (and the Treasury, as the BoC is publicly owned)?

This is explained in section 7.5 'Revenue Sources for the BoC'  (pages 38 -39). The CBDC in circulation (on a 'parallel system') will generate fees, as is the case with credit cards and such, to be paid mainly by retailers. So, the implementation of this system (as the phase II starts), will take potential earning from the banks.

'. . . suppose that 50% or 2.2B of the current cash transactions will be made in CBDLs [central bank digital loonies], and that the NB [narrow bank] charges a nominal amount of $0.01 per transaction (this fee may be paid by merchants, as it happens with credit cards today). Then the system will create annual revenues of over $20M, in perpetuity.' 

'In perpeturity'?  But the introduction says: 'to gain seigniorage income via CBDL issuance'


Seigniorage is narrowly defined as the difference between the face value of money created and the cost of manufacturing this money. So if the Government can create a note with a face value of $5, yet it costs only 10 cents to print, in a real sense, the nation as a whole has 'made' a $4.90 profit (so long as everyone continues to accept this note at face value):

'notably, in contrast to bank notes, the marginal cost of producing a CBDL is nominally zero.'  page 39

Hey, what's not to like about that? Seigniorage, however, also means profit earned from interest income. Since all money in our system is debt, whoever creates the money earns the interest on it. Twenty million dollars then, is potentially a huge (perhaps intentional) underestimation.


So seigniorage is a consideration in terms of production cost and user fees, but also, as the UofT/York paper states:

'Whether CBDLs bear interest or not, a viable option in the proposed architecture, is a policy decision beyond the scope of the work here. Project Roadmap. We propose an implementation in two phases.' page 7 

(My emphasis) The proposal, of course, deftly avoids expanding on this subject. Interest income is the commercial bank's Cash Cow  (so to speak), and there must be no suggestion (at this stage) that the BoC's 'Narrow Bank' will intrude on this. The term 'Narrow Bank' is chosen for this reason, to dispel such concerns; a narrow bank does not make loans:

'As discussed earlier, the term "narrow bank" is a non-legal term for a bank with limited operations. Narrow banks are typically categorized based on the fact that they are 100% fully funded and are prohibited from lending against deposits under the traditional fractional reserve banking system.' 


'Canadian banking regulations do not currently provide for a separate regulatory regime for narrow banks.' page 44 

Earlier incarnations of the narrow bank, however, did make loans. The Province of Ontario Savings Office (POSO) for instances (a public bank privatized by Mike Harris), did make loans for a period of time. This institution was founded, in 1922, specifically to provide loans for under-served regions and segments of society.


The Toronto/York paper also states the BoC may leverage 'existing public infrastructure (e.g., provincial service agencies, or Canada Post) to help implement the narrow bank.'


The most exciting part of this paper is that it appears a public bank will be essential when CBDCs are introduced.


Interesting, the Bank of Canada itself actually goes one step further, as we saw in the above mentioned paper – 'The Road To Digital Money' :

'people and businesses can open an account at the central bank.'

Wow. . .


Perhaps you already understand how important this statement is?

Why would accounts actually at the Bank of Canada, or at a 'complementary' public banking institutions, be essential to the process of rolling out CBDCs?


The answer to this is the reason we're not already using CBDC. Put simply, the commercial banks have not yet figure out a way to extract their cut  from this new 'expression of money.' They haven't yet figured out how to harness CBDCs to their own advantage, so that they can continue to profit from all of the economic activity of the nation.


The papers do provide a way this might be possible, however, and this is why as many people as possible need to understand something about CBDCs. We will examine these ideas next time, but there is one other interesting point to make here: The banks have not yet even figured out how to handle the digital wallets required to segregate CBDC for 'their money.'


CBDC, as described earlier, is real money ('base money' or 'risk-free money'); M0, in bank speak, along with central bank reserves, paper money and coins. From the Bank of Canada's  'Changing How We Pay' :

“The Bank will continue to explore the possibilities of a digital currency that would be an electronic version of the bank notes that Canadians trust and rely on.”

CBDC is potentially true, sovereign money, as it retains the ability to earn seigniorage income for the central bank, the government, and the people. This will not be the case, if a way is found  for commercial banks to create CBDCs on behalf of the BoC (as is being discussed), since this will leave us in exactly in the same situation we were before - with private money mascaraing as a national currency, profiting only the commercial banks.


The fact that your regular local bank would require you to have a digital wallet in order to keep CBDCs separate from your conventional bank account, is not only a massive logistical headache for the commercial bank (as the papers point out) it also begs the obvious question: "Why can't I just deposit my CBDC into a regular bank account"?


The answer to this:


Banks don't deal in 'money,' as we think of it, but in 'bank credit.'  Bizarrely, bank credit is not even defined as 'legal tender' and yet this is what the world operates on today, paying interest to the banks. 

In reality, we are 'renting' the money we use from private banks, and that's why this is such a sensitive issue for them. The banks, of course, would like everything to be electronic (using phones, credit cards and debit cards) because every transaction then earns them a profit – as opposed to CBDC earning seigniorage (in its various forms) for the people – but first the banks need to find a way to insinuate themselves (without it being too obvious) as intermediaries and, perhaps even issuers. 

The UofT/York paper explains:

'banking services remain expensive and cost savings have not been passed onto the end consumer [36]. The purpose of Phase 1 is to spearhead and establish CBDLs as a novel payment tool for cost-effective, fast, and easy cash-like transactions. . .' page 24

'Is the NB/CBDL System Competition to Commercial Banks?' The paper asks:

'. . . by virtue of the new entity's mandatory participation (as a registered bank) in the Canada Payments Association.' This shelter will inevitably promote an undesirable impression that the government is creating a public entity that "competes" with the private banking sector and it may trigger other undesirable / adversarial legal, reputation or practical concerns.'


'We recognize that any new form of e-payment can be perceived as competition to existing payment channels by some incumbents, unless private FIs start running this system from the very first day. As argued above, this latter practice raises a plethora of concerns.'


'. . . any argument that asserts that this system changes the competitive landscape would implicitly need to assume that commoditized payments allow for "bank rents." '

page 38

NB:  'unless private FIs [financial institutions] start running this system from the very first day'  – "bank rents."


The banks, therefore, must not be allowed to find a way to insinuate themselves into this process before it is set up. This is the challenge because the banks will fight tooth and nail to not be cut out. . . This is why it is of paramount importance that as many people as possible understand what is at stake here. It is not likely we will keep the commercial banks out, unless there is public pressure to keep them out.


We will look at ways this could be done next time. But I will close here by saying CBDC could be a good thing, only  if:

  1. The private FIs (banks) can be prevented from running this system from the start.

  2. If a public entity (such as the Post Office or a newly founded public bank – a  'Canuck Bank' perhaps) will handle the new CBDC accounts.

  3. If the new Narrow Bank (NB) isn't quite so narrow, and is allowed, also, to  make loans.

  4. Last but not least: If physical cash is preserved and promoted.

In the October 2020 Bank of Canada statement, Central banks and BIS publish first central bank digital currency (CBDC) report laying out key requirementswe read as follows:

A group of seven central banks together with the Bank for International Settlements (BIS) today published a report identifying the foundational principles necessary for any publicly available CBDCs to help central banks meet their public policy objectives.

The report, Central bank digital currencies: foundational principles and core features, was compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS, and highlights three key principles for a CBDC:

  • Coexistence with cash and other types of money in a flexible and innovative payment system.

  • Any introduction should support wider policy objectives and do no harm to monetary and financial stability.

  • Features should promote innovation and efficiency.

The group of central banks will continue to work together on CBDCs, without prejudging any decision on whether or not to introduce CBDCs in their jurisdictions.

It is entirely possible that 'Coexistence with cash' is included here solely for appearances, to reassure the public. I would suggest that the most important thing we can do right now, is hold the BIS and these seven central banks to their word, and insist that cash remain in existence to 'coexist' with CBDCs – especially considering the statement by BIS General Manager, Agustin Carstens  (Part II). 

With this, I'll wrap up our introduction to Central Bank Digital Currency. We'll continue soon, and pick up on a few points left 'to be continued.' This journey, however, is just beginning, and the 'landscape' (as the UofT/York CBDC team describes it) is changing daily, so there is much more to come.

Thank you for your interest. 


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