UAlberta mathematician Christoph Frei is using mathematical models to study the potential effects of digital currency to change our world. Photo credit: John Ulan
What if the Bank of Canada issued a digital currency, similar to Bitcoin? Would you open a chequing account? What about your credit card, loans, or a mortgage?
The idea isn't as far-fetched as you might think, with central banks around the world-including the Bank of Canada-exploring the possibility of introducing central bank digital currencies (CBDCs). Now, a University of Alberta mathematician is investigating the potential effects, using mathematical modeling to understand how CBDCs could change our world.
"A CBDC is electronically transacted and stored money, similar to existing cryptocurrencies like Bitcoin, but guaranteed by a central bank," explained Christoph Frei, associate professor in the Department of Mathematical and Statistical Sciences.
Like Bitcoin, CBDCs could use a distributed ledger, or blockchain, to record transactions, putting into question the role of intermediaries, such as commercial banks. But unlike Bitcoin, CBDCs would use the same units of account as traditional currencies and be guaranteed by a central bank, making them much more stable.
The idea of CBDCs is promising. It would mean lower transaction costs to consumers and an overall cheaper payment system. However, Frei explained, the use of CBDCs also poses some privacy concerns.
"One of the main concerns is related to privacy and surveillance. A person's transaction record shows all of the details of their life. If a state's authority has access to this data, there could be political pressure to use that data to, for example, monitor specific individuals. As a consequence, some people would not be able or willing to adapt to CBDC, thereby potentially suffering from an introduction of CBDC."
Frei recently received an Insight Grant from the Social Sciences and Humanities Research Council of Canada to study this issue, weighing the potential social benefits and risks.
"My proposed model features trade-offs between reduced transaction costs, on the one hand, and potential loss of privacy as well as entrance costs to set up the digital trading technology, on the other hand," he explained. "By developing a mathematical model for how CBDCs would affect prices and market fragmentation, we can analyze if and when CBDCs are socially desirable."