As cryptocurrencies grow in popularity, the C.D. Howe Institute says the Bank of Canada should issue a digital dollar to take advantage of advances in payments technology.
In this case, the digital currency would be linked to the Canadian dollar and could be converted to cash.
"Having the Bank of Canada issue digital Canadian dollars could play an important role in facilitating the emergence of cryptocurrencies in Canada while helping to retain the Canadian dollar as the country's principal unit of account," said Mark Zelmer, co-author of the report and former deputy superintendent of financial institutions OSFI.
"There would be a direct digital bridge between privately issued cryptocurrencies and a digital Canadian dollar issued by the Bank of Canada."
The C.D. Howe Institute says the digital currency should be in token form, with decentralized technology for settling transactions. It should also be well-designed and regulated from business conduct, competitive, operational, privacy and prudential perspectives.
According to the report, issuing a digital currency could encourage the private sector to introduce Canadian dollar-linked stablecoins by enabling convertibility to take place digitally without having to rely on physical banknotes.
The think tank says the stablecoin platform should have access to central bank liquidity facilities to ensure smooth transactions and deposit insurance to mitigate the risk of runs.
Bank of Canada exploring digital currency
Bank of Canada's Deputy Governor Timothy Lane was critical of private sector cryptocurrencies earlier this year, calling them "deeply flawed as methods of payment."
"Only a central bank can guarantee universal access, privacy and complete safety of a digital currency, with public interest as the top priority," Lane said in a speech in February.
But he did say he was open to something like what the C.D. Howe Institute is recommending.
"The Bank will continue to explore the possibilities of a digital currency that would be an electronic version of the banknotes that Canadians trust and rely on," said Lane.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.