Government-issued digital currency could be the coin of the future

Is cash on its way out?

With ongoing talk of the metaverse and an increasingly digital future, the concept of money has also become a point of interest.

In September 2021, El Salvador adopted bitcoin as one of its two official currencies. Over the last year, companies like Walmart and Amazon have hired digital currency and blockchain experts. And all over the world there's been an increased focus on central bank digital currency or CBDC — a digital, legal tender, issued by the government. 

Nigeria recently became the first country in Africa and the largest economy in the world to introduce a digital currency called eNaira. The Central Bank of Mexico is planning to launch a CBDC by the end of 2024. The Bank of Canada has also been conducting research into a CBDC Canadian dollar — essentially, a digital loonie that is verified by the government the same way our "regular" money is.

According to the GeoEconomics Center at the Atlantic Council, which runs a tracker, there were about 35 central banks interested in CBDCs two years ago. By July 2021, there were about 87. The surge in interest within the international community, reseacher Katrin Tinn said, has to do with growing talk and experimentation around cryptocurrencies in emerging spaces like the metaverse.

Bitcoin, smart contract innovation on Ethereum, as well as Meta-backed digital coin Diem are among the potential systems of means of payment that compete with central banks.

"So [these] parallel innovations and activities that happen [on] the private sector side, potentially are making central banks want to be a bit ahead of the game and consider it as well," Katrin Tinn, assistant professor of finance at McGill University, told Spark host Nora Young.

In 2021, Tinn and her colleague Christophe Dubach co-authored a proposal for the Bank of Canada's "Model X Challenge." The challenge asked three university-based teams to conduct exploratory design work on a Canadian central bank digital currency.

Tinn and Dubach's proposal focused on preserving user privacy, what they refer to as 'privacy asymmetry'. By design, the system would not associate an individual's purchases with their identity, but it would keep track of who receives that payment. "So in a way that resembles from a consumer's point of view, a little bit like going to an ATM, withdrawing cash and spending it."

Unlike Bitcoin, which is pseudonymous and creates a traceable digital footprint, CBDCs take advantage of blockchain technology and without the need for proof of work. "As it is controlled by central banks, in terms of money supplies, decentralizing this aspect doesn't look so important, but what looks important for us is the transparency a blockchain can provide."

Tinn says that because CBDC uses proof of authority to validate transactions, it offers a less energy- and resource-intensive option.

With a growing number of cryptocurrencies out there, Tinn said, a more unified and regulated digital currency would be better for future applications.

Beyond everyday applications in the real world, Tinn said that she could see CBDCs playing a role in the metaverse. "I think that what was inspiring our research was to think of where CBDC can bring extra value and why public institutions like the central bank would be better able to design it," she said.

With new innovations come new challenges and Tinn argues that before technologies like the metaverse and digital currencies come into being, it's important to think about what privacy would look like in these spaces. "It's always easier to undo privacy than to add privacy in a system that doesn't already have privacy," said Tinn.

Canada was recently dubbed the most cashless country in the world. Tinn says that the downward trend isn't likely to change in the years to come.

However, late last year, the Bank of Canada said that, for the moment, it would not launch a digital currency. "​​What I understand from discussions that happen in the Bank for International Settlements and by research they have been publishing, [there are] a lot of open questions and interesting topics on international coordination," said Tinn.

"Should all similar countries think of issuing at the same time a very similar central bank digital currency, or should they do their own thing and make the systems somehow compatible and talk to each other? These topics are being discussed internationally and can also determine the timeline."

Written by Samraweet Yohannes. Produced by Samraweet Yohannes, Michelle Parise and Nora Young.