By: Richard Li

Editor | Economics and Policy

Accounting for only 15% of economic spending in 2017, the Canadian economy has come to rely less and less on cash transactions, gradually moving towards digital payments. The COVID-19 pandemic has eroded the market share for cash even further, as most consumers and businesses prefer contactless payments to reduce their potential exposure to the virus. With Canada already on the brink of phasing out cash, it is time for the Bank of Canada to begin the process of eliminating cash altogether and fully adopting a trackable digital currency.

Given the reality of enormous COVID-induced federal and provincial deficits for the foreseeable future, a digital dollar will be able to positively affect the economy and the country in the following ways:

  1. A reduction in criminal activities through (i) an effective, enforceable crackdown on tax evasion, generating tens of billions of dollars in incremental annual government revenue, and (ii) increased oversight of traditional crime, including drug-trafficking, political corruption, terrorism financing, and money laundering
  2. Increased efficiency of fiscal stimulus through data-driven insights on the true multiplier effect of governmental spending
  3. The democratization of digital transactions, particularly for underbanked individuals and small businesses through a publicly funded and well-regulated digital transactions platform

While many may worry about the privacy, security, and ability of rural access, these concerns can be mitigated through a prudent approach to the adoption of a digital currency. Ultimately, the benefits of implementing a digital dollar far outweigh the drawbacks, as Canada can simply no longer afford to use cash.

Reduction in Criminal Activities

While the debate over taxation levels may never end, both Liberals and Conservatives can agree that tax evasion is a detriment to society, costing the federal government tens of billions of dollars in lost tax revenue every year. According to a recent bipartisan report from the American House Committee on the Budget, the IRS has failed to audit nearly one million wealthy individuals every year, costing the US government an estimated USD$46 billion in taxes. These same issues also apply to Canada, where the estimated tax gap – or the difference between the amount of taxes that should be paid, and the actual amount of taxes received – is likely much greater (on a per capita basis) due to our higher levels of taxation. While tax evasion from the wealthiest citizens certainly adds to the tax gap, there are other significant contributors, primarily the underreporting of corporate revenues and personal wages.

The true magnitude of tax evasion due to under-the-table cash transactions can be demonstrated through a common scenario where a business offers to waive sales tax if the customer pays in cash. Take for example a tow truck driver who charges $75 for a quick tow; while it may seem that the government would lose $9.75 of HST on this transaction, the actual tax gap is much larger. Given 13% HST, 20.5% combined corporate tax, and a 30% marginal income tax rate, the decision to pay cash results in a tax gap of $43.01 – an astonishing 57.4% of the original transaction value. While small business deductions and lower marginal tax rates could lessen this figure, the tax gap nonetheless accounts for at least 40% of all unreported consumption.

The International Monetary Fund, the Fraser Institute, and economist Friedrich Schneider all estimate Canada’s non-criminal underground economy to represent about 10-15% of its GDP, or at least $200 billion. As such, a (very) conservative combined tax gap of about $80 billion can be estimated, with the actual figure likely to be significantly higher.

While the House Committee’s findings clearly show that increased investments in government revenue services could severely reduce the tax gap, a transition to a cashless economy and a digital currency could virtually eliminate the entire gap. Through interpolation, the annual cost advantage for the federal government and the Ontario government of transitioning to a cashless society amounts to approximately $34 billion and $16 billion, respectively.

The impacts of this are widespread; not only would these aforementioned governments have covered all their deficits in the pre-COVID era, they would have also been able to provide better public services, additional economic stimulus, or – however ludicrous it may sound – even pay off outstanding public debt. Moreover, the estimates of the shadow economy only include tax evasion of legal activities; they do not include drug-trafficking, political corruption, terrorism financing, or money laundering, to name a few. While it is nearly impossible to put a numerical figure to overall crime reduction, going cashless will unequivocally increase the ability of law enforcement to crackdown on these illicit activities, thus decreasing their prevalence and their negative effects on society.

The socioeconomic benefits of a digital dollar are clear: the full digitization of the Canadian dollar along with automatic taxation enforcement systems will generate over $2,000 in incremental annual tax revenue per capita, while also significantly reducing traditional crime rates.

Increased Efficiency of Fiscal Stimulus

Since the widespread adoption of Keynesian economic theory during the first half of the 20th century, the use of government stimulus during contractionary periods has become economic orthodoxy. A primary component underpinning fiscal policy is the size of the Keynesian multiplier, or the increase in the overall size of the economy relative to the amount of governmental spending. Though the exact size of this multiplier may be fiercely contested, the multiplier functions as a proxy for how effective fiscal policy is, particularly if it comes in the form of economic stimulus.

During the onset of the COVID-19 crisis, the Canadian government aimed to increase aggregate demand through the distribution of the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB). However, a stimulus cheque would have vastly different consequences for a single mother in a rural area compared to an upper-middle class student; while one might use those funds to purchase essential goods from local businesses, another might find no need to spend those funds, resulting in them investing public money for private gain in the equity markets. As such, the former situation would have a relatively higher spending multiplier, contributing significantly to their local economy, while the multiplier for the latter situation would be virtually zero.

It is quite clear that mainstream politicians are now focusing less on economic theory, and more on political pandering. A fully trackable digital dollar has the potential to fundamentally change the nature of economics, finally allowing the field to be represented through the science of mathematics rather than the art of persuasion. Instead of taking a top-down approach in estimating the impact of government spending, each and every dollar of the fiscal budget can be tracked to understand exactly which policies work and which do not, increasing the efficiency of public sector spending. The current lack of analytics is reflected through the 30% of CERB and CESB payments that went towards high income families with relatively low consumption propensities, resulting in the waste of an incredible $23 billion.

Although it may seem doubtful that the public sector could track stimulus down to the dollar, some governments have already adopted data-driven public spending due to the economic impacts of the COVID-19 pandemic. In March 2020, the South Korean province of Gyeonggi launched a universal-basic-income project nicknamed “Gyeonggi Pay”, in which every adult was given a government-issued debit card with the equivalent of CAD$95 per month. In contrast to Canada’s stimulus programs, Gyeonggi Pay was fully digitized, allowing their provincial government to significantly increase the economic multiplier of the stimulus by restricting all spending within provincial borders and enforcing a date of expiration for the funds.

By tracking spending on the stimulus cards and the revenues of local businesses on an aggregate level, the Gyeonggi government could truly quantify the exact effects of their stimulus. The socioeconomic success and fiscal responsibility of this system has pushed Gyeonggi Governor Lee Jae-myung into the political spotlight, where he is currently leading the polls in the upcoming South Korean Presidential election. With a national data-driven UBI being his cornerstone policy, South Korea could soon generate revolutionary insights with the potential to redefine the entire field of economics.

The Democratization of Digital Payments

To fully adopt a digital currency, there must be support for not only payments on mobile devices, but also support for a new proprietary device – a reality that the Bank of Canada already acknowledges in its assessment of issuing a digital currency. Moreover, a BoC-backed digital dollar platform would serve to alleviate, rather than aggravate, the relatively high unbanked or underbanked populations in rural, northern, and indigenous communities. Currently, private financial institutions are physically present in very few of these locations, often charging exorbitant fees while also having well-documented discriminatory practices. A digital dollar could address many of these issues.

Given the inevitable march towards a society which relies less and less on cash, reality now presents two stark choices: a cashless future controlled by tech giants, financial service providers, and payment processors, or a cashless future enforced by central banks and regulated by democratic institutions. While Facebook and Google generate massive profits due to their swathes of data, Mastercard and Interac are arguably worse, thanks to the enormous economic deadweight losses created by their 2% to 9% transaction fees.

With offline (NFC) capabilities and direct instantaneous transactions, the Chinese “Digital Yuan” clearly illustrates how a digital currency can increase access to financial services in rural areas while also increasing economic efficiency. Though the Chinese government will certainly turn a blind eye to the issue, western democracies can enact new legislation for digital currency privacy standards, protecting individual data privacy to levels far surpassing the status quo.

The question of whether Canada should develop a digital currency revolves around the importance of monetary sovereignty. Unsurprisingly, the Canadian public places overwhelmingly more trust in the Bank of Canada than any payment service provider, commercial bank, credit card company, or tech company, as reflected by the bank’s non-partisan mission and strong institutional frameworks. As such, the BoC should strongly consider a plan for the full adoption of a digital Canadian dollar to ensure that the Canadian dollar and the Canadian economy rests within the control of the Canadian public.

A Progressive Way Forward for Money

A digital Canadian dollar is essential during the economic uncertainty that has stemmed from the COVID-19 crisis. The economic benefits are clear; reducing tax evasion will generate additional governmental revenues, implementing a data-driven fiscal policy will maximize the effect of stimulus, and providing a public payment processor option will substantially reduce economic deadweight losses. Combined with the social benefits of reducing crime, lessening needless partisanship, and democratizing Canada’s financial institutions, the argument in favour of a digital currency becomes irrefutable.

Though Canadians should rightfully be concerned about privacy and accessibility issues, perspective is key; a digital currency does not create these issues, but rather highlights and provides a working solution to them. While we certainly must consider the potential drawbacks of a digital dollar, the economic and social costs of the status quo are simply unacceptable, particularly in this time of economic and social uncertainty.