Canada needs a plan for digitalization of money: Bennett Jones report

Integrated agenda needed to not be left behind

Canada needs a plan for digitalization of money: Bennett Jones report
Serge Dupont and Mark Jewett, Bennett Jones LLP

Canada needs an integrated agenda and work plan for the digitalization of money, says a Bennett Jones report, but the outstanding question is how to design and implement a timely and adept response to the changes needed to make it happen.

The report says that “complacency with the status quo — the passive acceptance of today’s high and often hidden transaction costs, or a benign neglect of forces of change that can generate new value but also new risks — is not an acceptable course.”

The report was prepared following a conference on the topic in August, hosted by Bennett Jones and the Centre for International Governance Innovation. It acknowledges that the case for developing a plan for the digitalization of money “needs to be made in compelling terms to decision makers, particularly to elected officials who may not yet be facing political pressure to act, despite a shifting of tectonic plates.”

Serge Dupont, a senior advisor with Bennett Jones who worked on the report, says there already has been some work done by government or agencies on different parts of the larger issue of digital money.

Dupont, who was a senior executive in the Government of Canada with close to 35 years of experience in economic and financial policy before joining Bennett Jones, points to areas such as the modernization of payment systems, legislation (which died following the dissolution of the last parliament before the election) on privacy and data management, discussions on the concept of “open banking,” and the Bank of Canada looking into a central bank digital currency.

“However,” he notes that there is no evidence of “integration of this work into some agenda, some kind of plan.” Dupont adds that the August conference was held to help bring together the private sector, government, and international experts to envision a plan that could work.

Those at the conference agreed that coming up with such a plan has practical benefits to consumers, households, and small services, in terms of lower costs, and better services, Dupont says. But he adds that developing a plan for digitalization of money and related areas would take advantage of a “fertile” ecosystem of fintech innovation that already exists in Canada.

If there is no development of such a plan, Dupont says we may lose control of some of the levers of our financial system to Big Tech or foreign financial institutions and “become a regulation taker rather than a regulation maker.” Already, the private sector has been a big player in the modernization of payment systems and open banking in the form of applications from third parties that can access a customer’s financial data through “screen scraping” to provide additional services. However, the way such open banking systems are currently set up, he says, there is no way to guarantee the security of the data.

“Governments have said they’re interested in doing this,” but they “have yet to really advance the yardstick in terms of a regulatory regime,” both federally and provincially.

As for a central bank digital currency, Dupont says work must happen in Canada because “this is a development that, may again, be happening outside of Canada” and could define our future “unless we ourselves start doing the work now.”

Mark Jewett, a CIGI Senior Fellow and counsel to Bennett Jones LLP, with extensive experience in financial services and public law, notes that developing a plan on the digitalization of money requires legislation at both the provincial and federal levels of government. Canada’s constitution gives provinces extensive rights and responsibilities in this area, but the federal government has broad jurisdiction in the financial sector.

As well as potential challenges within Canada, Jewett notes there are constraints from the “international and global environment.”

The report says that governments, regulators, and market participants will have to situate their work in an international context. This is to ensure “that Canada participates actively in the design and operation of international standards, rules and platforms that will support cross-border financial activity and payments and aligning decisions at home to ensure that our financial system meets evolving global norms.”

The report also suggests that ultimately a framework for a modernized money and payments system in Canada will likely have to be done through some form of public-private partnership.

“Thus, there must be solid engagement with the financial services industry and delegation to the private sector,” the report says, or to third-party organizations such as Payments Canada, the CIO Strategy Council or standards bodies. They all should be given specific responsibilities in executing a plan and helping create a digitalized financial system.

Jewett, whose long public service career included a stint as general counsel and corporate secretary of the Bank of Canada, notes that the Bank for International Settlements has an innovation hub meant to put forward work on digital currency. It recently established a branch in Toronto. It could work with the Bank of Canada, he says, adding, “we certainly have the capacity within the Bank of Canada to do this.”

The report says that while there is a need for all involved parties to work together, “there will not always be consensus, and governments will have to make choices.”

For example, the report notes market incumbents will not voluntarily open up shielded and lucrative lines of business to new competition. Big Tech will be opposed to forms of regulation that will conflict with their desired business models. Payment service providers and fintech firms may be unhappy with the costs imposed by measures enacted to protect users and maintain trust in the system.

As well, “consultation will need to be thorough, but efficient, with a concern for timeliness.” However, the report concludes that “Canada has the credibility and the capability to contribute to international efforts.”

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