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China’s President Xi Jingping caused quite a stir recently, after making a speech embracing blockchain technology and cryptocurrency, calling on his nation to take a leading position in the sector. Subsequently, the country passed a new cryptocurrency law, as it prepares to launch its own digital currency. With similarities to Facebook’s Libra, China’s proposed crypto would be used across all major payment platforms. Although the US and various European countries have been somewhat resistant to idea of cryptocurrencies and blockchain technology, by and large, international governments are recognizing the tremendous potential of tradable government-backed digital currency. One of the global leaders at the forefront of researching how to best create and manage a national bank-backed digital currency, has been Canada.
The Bank of Canada’s Groundbreaking Digital Currency and Finetech Research
For several years, the Bank of Canada has been conducting groundbreaking research on digital currencies and financial technology (better known as fintech). In addition to research, two other areas of ongoing work by the bank include experiments and projects, and a global regulatory framework agenda.
“Understanding the benefits and risks of digital currencies and electronic payments is important. That’s because they could have an impact on our core central bank functions. For the past few years, we have researched private and central bank digital currencies. More recently, we’ve been studying other uses of Distributed Ledger Technology (DLT),” the Bank of Canada explained in a report.
There are multitudinous areas of study covering the Bank of Canada’s finetech research. For instance, the bank monitors trends in the awareness and use of Bitcoin by Canadians, by using the Bitcoin Omnibus Survey (BTCOS). Since 2016, the BTCOS has been conducted with the latest survey for 2018. Collectively, the survey has found that from 2016 to 2018, both Canadian awareness and ownership of Bitcoin has increased. These latest BTCOS findings also concluded that the principal reason for Bitcoin ownership was for store of value, or as an investment.
The Economics Of Cryptocurrencies
Another area of research that has been conducted is the economics of cryptocurrencies. This facet of the Bank of Canada’s study of finetech has revealed some very compelling findings, specifically regarding the functions of a cryptocurrency system like Bitcoin.
“A cryptocurrency system such as Bitcoin relies on a decentralized network of anonymous validators to maintain and update copies of the ledger in a process called mining. In such a permissionless system, someone can cheat by spending a coin twice, which leads to the so-called double-spending problem. A well-functioning cryptocurrency system must ensure that users do not have an incentive to double spend,” the bank explained in a report of the study.
For this specific study, a “general-equilibrium model” of a cryptocurrency was created. Not only was this model able to eliminate the aforementioned issue of double-spending, but it was also used to calculate the welfare costs of using crypto as a payment method.
“We find that it is better to use the revenue from currency creation rather than transaction fees to finance the costly mining process. We estimate that Bitcoin generates a large welfare loss that is about 500 times bigger than the welfare loss in a monetary economy with 2 percent inflation. This welfare loss can be lowered in an optimal design to the equivalent of that in a monetary economy with moderate inflation of about 45 percent,” the report further concluded.
The Blockchain Research Institute
Because of its extensive research into digital currencies and finetech, the Bank of Canada consistently monitors the latest developments in the sector. Additionally, the bank is a founding member of the Blockchain Research Institute (BRI). The institute is “funded by a membership consisting of international corporations and government agencies, our research program is founded on 100+ projects documenting the strategic implications of blockchain on business, government and society”.
Research is the fundamental cornerstone of the institute. There are over 100 research projects being conducting pertaining to numerous verticals including government and democracy, financial services, technology, healthcare, and manufacturing, to cite a few. Some recent research projects of particular interest that have come from the institute include using blockchain technology to navigate the post-trust world, autonomous vehicles, and blockchain technology being used to clean up the world’s ocean ecosystems.
Regarding the study pertaining to autonomous vehicles, this research project explores how blockchain technology will optimize autonomous vehicles, including those with the capabilities of vertical takeoff and landing. The project highlights the Mobile Open Blockchain Initiative, which includes prominent tech companies and 80 percent of the world’s auto manufacturers.
Apropos of the last one, this study examines how blockchain could be utilized to assist in the crucial clean up of the world’s oceans. It highlights the work of Ocean Marine Blockchain Solutions, in collaboration with Harvard University’s Girguis Lab, and the Jamaican-based Alligator Head Foundation.
A Functional Stablecoin
The major conclusion that the Bank of Canada has found in its research on how to create and manage a national bank-backed digital currency, is a stablecoin. This is a new class of cryptocurrency, which is managed to offer relatively constant value, coupled with being backed by a reserve asset.
“It’s interesting how exciting these developments can be. There’s a whole class of crypto assets called stablecoins. What’s exciting about it is the fact that these kinds of innovations can address what I think are important issues in global payment systems, particularly the cost of cross-border payments,” explained Carolyn Wilkins, Bank of Canada senior deputy governor in a recent press conference on monetary policy.
One example of the functionality of such a central bank-backed stablecoin would be remittances when individuals working abroad send money home. Additionally, a stablecoin could be a reliable currency unit in developing countries lacking a stable financial system.
Yet, akin to every innovation, stablecoins have their drawbacks.
“We know that innovations never come without risk. The costs that we all know that are related to money laundering and terrorist financing, but also, with respect to safeguarding the value of that stablecoin properly, as well as potentially getting in the way of monetary sovereignty of different countries,” Wilkins said at the press conference.
Drawbacks and risks aside, the Bank of Canada is not alone in lauding the benefits of a stablecoin as a national central bank-backed digital currency.
World Governments Have Met To Collectively Discuss A Global Stablecoin
International leaders have been meeting at the likes of the International Monetary Fund, and the G7 to discuss the idea of a global stablecoin.
“The developers of the crypto-assets labeled “stablecoins” seek to reduce volatility by anchoring the “coin” to a reference asset (eg a sovereign currency) or a basket of assets. While issuance and usage of stablecoins to date have been limited, a number of new stablecoin initiatives backed by large technology companies or financial institutions could have the potential for widespread adoption.
A global stablecoin for retail purposes could provide for faster and cheaper remittances, spur competition in payment services and thus lower costs, and support greater financial inclusion. In this regard, stablecoin initiatives highlight the need to step up ongoing public and private efforts to upgrade existing payment systems,”explained Benoit Coeure, Chair of the CPMI and Member of the Executive Board of the ECB, to the G7 Finance Ministers and Central Bank Governors.
The Move Towards Digital Currency
Internationally, there has already been a move towards digital currency in one form or another. Sweden, for instance, has already taken measures to phase out conventional money. Likewise, of course, are the recent aforementioned developments in China regarding its own national cryptocurrency. As more nations recognize the potential of a state-backed digital currency, Canada has been a world leader in providing groundbreaking research for this hitherto, relatively uncharted territory.
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