Understanding money in the 21^st century

Here's what money does—and how we’re handling it in the digital age.

What is money?

It’s hard to imagine a world without money. Before money, people had to trade goods and services. This was difficult and inconvenient—imagine using cows to pay for clothes or paying your babysitter with wheat.

One way to answer the question “What is money?” is to describe what it does and the problems it solves.

• Money is a medium of exchange. It makes it easier to buy and sell things. For example, it’s easier to reach into our wallets at the grocery store than it is to herd cattle or carry bushels of wheat into the store.
• Money is a store of value. A big problem with using things like cows and wheat as currency is they don’t last forever. After a while, cows get old and wheat spoils, so they lose their value. A $10 bank note will be worth its face value no matter when you spend it.
• Money is a unit of account. Money makes it simple to compare prices. If one merchant accepts cows for payment and another wants wheat, it’s hard to figure out which is the better deal. It’s easier when everything is priced in dollars.

Here’s another way to think about modern money: It’s a social agreement. Society gives value to bank notes and coins, and this helps us make informed choices when we buy what we need, save for the future or settle debts. But money can keep its value only if people have confidence in it. The Bank of Canada works to make sure the country’s dollars hold their value over time.

Making money for Canadians

When most people think of money, they picture bank notes and coins. It’s the Bank of Canada’s job to design and produce the country’s bank notes and the job of the Royal Canadian Mint to produce coins.

Durability and accessibility

Bank notes must be functional and usable in automated banking machines (ABMs) and other cash-handling machines.

They must also be recognizable as Canadian notes. The design supports the Bank’s commitment to providing blind and partially-sighted Canadians with an effective suite of accessibility features so they can recognize bank note denominations.

Martine Warren, a bank note specialist from the Bank of Canada, talks about the technology and testing that goes into making our bank notes durable and secure. As well, Diane Bergeron from the Canadian Institute for the Blind shares her experience with features that make Canadian notes accessible to those who are blind or partially sighted.

Security

The Bank makes sure Canada’s bank notes are secure and accepted for payments by making it hard to counterfeit them.

The bold security features on the vertical $10 note are easy to check and difficult to counterfeit.

There’s more to money than cash

These days, we more often make payments electronically, through debit cards, credit cards or tapping our smartphones. We’re shifting away from traditional forms of payment like bank notes and cheques.

Dinesh Shah, a Bank of Canada researcher, and Stéphanie Nolin, an online entrepreneur, talk about current trends in e-commerce. Our payment options are growing daily, but does this mean the death of cash?

Payment and clearing systems

No matter how you pay for something, the right amount of money must go from the buyer to the seller. With cash, it’s simple. With electronic payments, it’s more complex. Think about what happens when you tap your debit card. That action triggers a command for your bank to send a certain amount from your account to the seller’s account. And that account may be at a different bank.

The system works because our banks and payment systems have the controls in place to get it right—every time. Every electronic transaction is recorded, and Payments Canada makes sure the correct amount of money travels through our payments system.

It’s crucial for the Bank of Canada to understand how money moves through these systems because it’s our job to:

• oversee payment systems that are important to the financial system
• promote the safety and efficiency of these payment systems to manage possible risks to Canada’s financial and economic stability

Digital currency

If you have a PayPal account or use prepaid cards to buy video games, you are using digital currency. This form of money comes in familiar units, such as Canadian or US dollars, and lives on a mobile phone, tablet, smart card or computer server.

Unlike an electronic payment, where money travels from a buyer to a seller, digital currency is parked in a “storage facility” during its electronic journey from source to destination.

Many paying one

Think of someone who rents out their property as a vacation home and uses an online payment service like PayPal to collect money from many different customers. The online payment service gathers a pool of money that is then transferred to their account.

One paying many

Or, think of one person using a prepaid payment card for a shopping trip. Whether the shopper uses the stored funds for a single purchase in one store or many purchases at different locations, the merchants receive payment for the goods from the payment service provider, not the shopper.

Why we love paying digitally

• It provides the speed and convenience of cash without the hassle of carrying and counting out coins and bills.
• It is how we shop online.
• It means merchants don’t have to process cash or make change.

Financial technology—or fintech—is changing how we pay for things around the world.

Cryptoassets

All the electronic transactions we’ve talked about so far leave a record that can be traced. Until recently the only way to buy or sell something anonymously was to use cash.

That’s changing with the use of virtual products, such as bitcoin. These live and move on a computer network that directly links users. Transactions take place between anonymous addresses and are recorded on a “distributed ledger.” There is no trusted third party to manage the system or gather user information.

Many people use the term “cryptocurrencies,” but the Bank prefers to call them cryptoassets. That’s because these products don’t do a good job of performing the basic functions of money.

Cryptoassets don’t function like traditional money

Think back to the beginning of this article about what money is supposed to do.

• Cryptoassets aren’t widely accepted as a medium of exchange. Try to find a supermarket that lets you buy groceries with bitcoin.
• Cryptoassets aren’t generally a reliable store of value. For example, the price of bitcoin jumped from just over US$1,000 at the start of 2017 to more than US$18,000 in December of that year. Then it fell by three-quarters over 2018.
• Cryptoassets don’t work well as a unit of account. Because cryptoassets aren’t associated with national currencies, such as the Canadian or US dollar, vendors that accept them need to constantly adjust their prices.

Stablecoins on the horizon

We’ve been keeping a close eye on all developments in the field of cryptoassets. These include stablecoins, which can work as a unit of account. That’s because they’re designed to be fixed to an underlying currency or asset.