Bank of Canada Staff Discussion Paper 2021-17: 'Revisiting the Monetary Sovereignty Rationale for CBDCs'

'Revisiting the Monetary Sovereignty Rationale for CBDCs'

Skylar Brooks

A justification for introducing Central Bank Digital Currencies (CBDCs) has been to safeguard countries against the loss of monetary sovereignty, particularly currency substitution (when foreign monies displace domestic currencies) which could undermine the ability to effectively conduct monetary policy and the central bank role of being lender of last resort (LLR) to the financial system.

This paper looks at the implications of currency substituting that go beyond the functions of central banks, to consider the key differences in monetary policy and LLR, particularly variations in and consequences of degrees of monetary sovereignty, and to assess the implications and risks of currency substitution and how they vary between countries.

Summary of key points