A new discussion paper from the Bank of Canada questions the proposition that a central bank digital currency (CBDC) would address unmet payment needs in a cashless society. It expresses doubts about whether the incentive for the use of a CBDC at scale exists.

Canada’s central bank has been researching issues around CBDCs, and the paper points out it is committed to being ready to provide one if the need arises. One scenario in which the need could arise is a move to a cashless society, and CBDCs have been cited when addressing concerns that some people would be unable to make payments or participate fully in the economy.

Payment-oriented CBDC

But research conducted for the discussion paper concludes that: “For a payment-oriented CBDC to successfully address unmet payment needs, the main consumer groups – who already have access to a range of payment options – would have to widely adopt the CBDC and use it at scale”. It says that would be “necessary to encourage widespread merchant acceptance of CBDC, which would, in turn, encourage further consumer adoption and use”.

And it says that, as most consumers “face few payment gaps or frictions”, there is not a particularly strong incentive to adopt and use a CBDC at the scale required.

The paper cites research showing that 98% of Canadian adults have a bank account, 87% hold a credit card, and 90% of households have access to high-quality internet services. So most consumers have access to a range of payment options.

Transaction privacy

The discussion paper points out that cash is unlikely to vanish instantly, it would happen over a period of time with consumers and retailers gradually modifying their habits. This could also see developments such as the introduction of digital payment methods that bear some of the characteristics of cash, such as greater transaction privacy, and the emergence of pricing according to payment method.

One option for the bank would be to establish a payment-oriented CBC which, it says, “would enable electronic transfers while retaining, as much as possible, the distinctive features of cash”. These features are;

• universal accessibility – easy for anyone to use, in principle;  
• non-interest bearing; 
• limited incremental costs for the consumer at the point of transaction;
• a high level of privacy, but not anonymity;
• capability to conduct offline transfers.

Consumers who are cash-dependant, place a premium on privacy or who are technology-averse would be the most likely to face gaps in meeting their payment needs in a cashless society, so they would benefit most from a CBDC. But they would face relatively high adoption costs and are a relatively small share of the market. And, of course, the technology averse segment would be by definition less likely to adopt a new payment technology. Put all these factors together and it doesn’t add up to encouraging widespread merchant acceptance.

So, ironically, as the paper observes, “The minority of consumers with unmet payment needs will only be able to benefit from a CBDC if the majority of consumers experience material benefits and therefore drive its use“.