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The Potential Impact of Digital Currency
Digital currency could transform how society views and uses money. With the rise of Bitcoin, Ethereum, and numerous other cryptocurrencies, global central banks are exploring how national digital currencies might function.
What Is Digital Currency?
Digital currency exists solely in electronic form. Many countries’ financial systems already rely heavily on digital transactions. For instance, instead of using physical cash, you could make purchases by transferring digital currency via mobile apps like Wealthsimple Cash, PayPal, or Apple Pay. This concept is similar to how people currently use these payment methods.
How Would a Central Bank Digital Currency (CBDC) Work?
While Canada may not have a CBDC yet, Jim Cunha, senior vice president at the Federal Reserve Bank of Boston, has outlined how a CBDC could work in the U.S. He compares it to physical cash: “Receiving a CBDC is like getting a $100 bill—you have it in your account, and I can't take it back.” This differs from other electronic payment methods like PayPal, where money is often just a promise, and transactions can be reversed or delayed.
CBDCs offer several advantages:
- Irrevocability: Transactions would be final and nearly instantaneous, with no possibility for reversal.
- Legal Tender: CBDCs would be recognized as legal tender, meaning they must be accepted for all debts and transactions, including paying taxes. This is unlike current digital currencies, which are not universally accepted and often require conversion into traditional money.
Testing is already underway in several cities. For example, millions in CBDC are distributed through lotteries, allowing winners to spend it at participating local businesses.
China and the UAE are also experimenting with CBDCs for regional payments, using blockchain technology. Success in these projects could inspire other countries to develop their own digital currencies.
Future Outlook
Lilya Tessler, head of Sidley’s FinTech and Blockchain group, predicts broad adoption of digital currencies but acknowledges uncertainty about their exact form. A CBDC might eventually replace paper money, while decentralized cryptocurrencies could gain mainstream acceptance.
Overall, digital currencies have the potential to reshape financial systems and everyday transactions in significant ways.
