Centralized System More Efficient and Beneficial than Blockchain: Bank of Canada

Bank of Canada Digital Currency
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The Bank of Canada isn’t keen on a blockchain-based interbank payments system.

Canada’s central bank has claimed a standalone a standalone wholesale blockchain system is ‘unlikely’ to match the net benefits of a centralized system after testing its digital currency CAD-Coin, developed in collaboration with blockchain startup R3.

The apex bank revealed results of the second phase of its first ever blockchain endeavor, an experimental wholesale public-private interbank system based on blockchain tech named Project Jasper.

Launched in 2015, the project sees the central bank partner New York-based blockchain startup R3 (which leads a namesake global banking blockchain consortium), seven commercial banks and Payments Canada, the operator of Canada’s payment clearing and settlement system, which clears about C$175 billion ($130.42 billion) in transactions on a daily average in the country.

Bank of Canada’s CAD-Coin Blockchain Test

As CCN reported in June 2016, the central bank’s aim was to develop a “wholesale interbank payment system” with CAD-Coin. Participants would pledge cash into a Central Bank-controlled account, where the fiat cash would be converted to its equivalent in CAD-coins. Trusted parties will then be able to transact with the digital currency on the platform. The registry and the blockchain platform will be owned and controlled by the central bank, affording it the authority to destroy CAD-Coins when they are converted back to cash.

A quick summary of the results, as revealed by the report [PDF], is that despite notable progress made in blockchain innovation, there are many hurdles left in underpinning blockchain or distributed ledger technology (DLT) for an interbank payments system.

A few notable takeaways from the Bank of Canada’s experiment are:

  • Changing Role: In a blockchain framework, the Bank of Canada sees “the operator’s role would likely be closer to that of a rule maker or standard rather than a traditional IT infrastructure operator.
  • Greater Integration: “Perhaps the biggest lesson from Project Jasper is just how valuable public-private sector collaboration can be” stated Payments Canada CEO Gerry Gaetz. Both sectors were able to learn about the technical aspects of blockchain technology while cultivating a collaboration to overcome technical obstacles in complex processes.
  • Cost Savings: The benefits of a blockchain payment system could bring “sector-wide” cost savings, is a blockchain-based core interbanking payment system could integrate with other blockchain ledgers of financial assets like exchange-traded assets, etc.
  • Applications: The Bank of Canada sees blockchain technology’s true benefits to lie among the broader financial market infrastructures (FMI) ecosystem. Integrating other assets on the same ledger as payments, could be a way to go, the bank claimed.

Tellingly, however, Canada’s central bank does not see a wholesale blockchain payment system matching a centralized system.

Carolyn Wilkins, senior deputy governor of the Bank of Canada, stated:

The bottom line is that a stand-alone DLT wholesale system is unlikely to match the efficiency and net benefits of a centralized system. At its heart, there exists a fundamental inconsistency between a centralized wholesale interbank payment system and the decentralization inherent in DLT.

CCN has not dissected the report to know what the statement means exactly. More on this in time.

Successful Runs

In contrast, other central banks and nationwide banking groups conducting blockchain experiments have seen successful results. The most common example is that of Singapore, where the country’s central bank completed its own blockchain interbank payments pilot successfully and is pressing ahead with plans to conduct cross-border payments using its internally-developed digital currency.

The Japanese Banking Association (JBA), the body that represents all banks with a presence in Japan, is to test money transfers over a blockchain using digital currencies. The JBA is also the operator of the country’s payments platform and is looking at uprooting its existing framework to replace it with blockchain technology.

Japan’s three ‘megabanks’ partnered Japan’s largest bitcoin exchange, bitFlyer, to test money transfers on a blockchain developed by the bitcoin company over an extensive 9-month period. The tests fared better than expected, as the blockchain, titled ‘miyabi’ clocked 1,500 transactions per second, beating the peak speeds of the JBA-managed interbank wire system.

Featured image from Shutterstock.

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