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FT: Canada experiments with digital dollar on blockchain

Philip Stafford    

 6/17/2016

Canada experiments with digital dollar on blockchain ­

Last updated: June 16, 2016 5:06 pm Philip Stafford Canada is exploring the creation of a digital version of its currency as central banks examine whether modern technology can create a new medium of exchange.

The Bank of Canada, the country’s central bank, revealed in a private presentation in Calgary on Wednesday that it was working with the country’s biggest banks to develop an electronic version of the Canadian dollar.

It is examining how to put a government ­backed, or fiat, currency on blockchain, the digital ledger that underpins cryptocurrency bitcoin. Full adoption would mark a significant advance for the emerging technology.

According to slides seen by the Financial Times, the initiative will involve issuing, transferring and settling central bank assets on a distributed ledger via a token named CAD­Coin. It is being carried out in conjunction with several of Canada’s biggest banks, including Royal Bank of Canada, CIBC and TD Bank, as well as Payments Canada. It is using intellectual property developed by R3, a New York consortium of more than 50 of the world’s biggest banks.

Financial institutions have been keen to exploit the much­hyped technology, which works as an electronic ledger that is continuously maintained and verified in “blocks” of records. It is shared on computer servers between various parties and protected cryptographically to prevent it from being altered.

Putting a fiat currency on a distributed ledger could pave the way for customers to deposit money with their central bank directly rather than use a commercial bank. The Bank of Canada said the experiment was a proof ­of ­concept and confined to interbank payment systems. “Other frameworks need to be investigated, and there are many hurdles that need to be cleared before such a system would ever be ready for prime time,” said Carolyn Wilkins, senior deputy governor of the Bank of Canada. “None of our experiments are to develop central­bank issued e­money for use by the general public.”

Advocates have argued that blockchain — which combines the peer­ to ­peer computing ethos of Silicon Valley with the money management of Wall Street — can free up billions of dollars of costs included in delays and insurance within the financial system.

Attacks on banks using existing payments infrastructure such as Swift have also highlighted security flaws. Sceptics of blockchain say the technology does not adequately improve existing market operations such as settlement systems. They also say that the technology’s promise cannot be fulfilled until government­backed currency is issued on the ledger.

 In a speech last year Andrew Haldane, chief economist at the Bank of England, said the central bank may be able to use a government­backed electronic currency as a way to levy negative interest rates

Under Project Jasper, participants would pledge cash collateral into a special pool, which the central bank would convert to CAD­Coin. That would be then used as a medium of exchange but the central bank would retain the ability to destroy redeemed CAD­Coins.

Other central banks, notably the US Federal Reserve, have also been exploring its use. Earlier this month the US central bank hosted a meeting of 100 central bankers and regulators from around the world to discuss its future.

 

6/17/2016 Canada experiments with digital dollar on blockchain ­