Project Jasper: Lessons From Bank of Canada's First Blockchain Project
Canada's central bank discusses new takeaways from six months of distributed ledger experimentation.
Carolyn Wilkins is the senior deputy governor of the Bank of Canada, where she oversees the central bank's strategic planning and economic and financial research. She also represents the bank on the Financial Stability Board.
In this CoinDesk Opinion piece, Wilkins looks back on key takeaways from nearly six months of distributed ledger learnings, asserting that more healthy collaboration is needed to advance incumbent use of the technology.
It's not surprising that central banks have developed a keen interest in fintech and distributed ledger technology (DLT).
We want to understand the implications for our mandates – monetary policy, currency issuance and financial stability – and also for the financial technology we use ourselves to run our business.
Private investment in DLT platforms and test cases goes well beyond digital currency applications. A whole new industry sees promise for wholesale and retail payments, trade finance, securities trading and finance, regulatory compliance and more.
But, with great promise comes a host of technical and policy issues that need to be examined and resolved before DLT applications in core parts of the financial system are ready for prime time.
There's no better way to understand an innovation than to collaborate with experts around the world and to get in at the ground floor and experiment.
That's why over the last year, we've extended our work beyond fundamental research on electronic payments to contribute to the global fintech regulatory agenda, experiment directly with DLT and exchange views with innovators in the industry.
Project Jasper is our DLT flagship experiment, first revealed last June in a speech in Calgary. It's a joint initiative between Payments Canada, the Bank of Canada, major Canadian banks and R3. We've built and are test driving a simulated wholesale payment system using a DLT-based settlement asset (dubbed 'CADcoin' or 'settlement coin').
The experiment will be ongoing until later this spring, but already it has taught us a lot about how the technology would have to improve to win a horse race with our current Large Value Transfer System.
The project team had two clear objectives. The first was to see how the test system could meet international standards for systemically important payments infrastructure that would be set if the system were ever to go live (ie the Principles for Financial Market Infrastructure (PFMIs)).
The Bank of Canada cares about this because of our oversight role in systematically important systems.
The work done to date has shown that the test system could meet the PFMIs concerning collateral, credit risk, money settlement and liquidity risk. There are some important gaps, though, with respect to settlement finality, operational risk, as well as access and participation requirements.
The team is now looking at a new platform build to see if these gaps can be addressed.
The second objective was quite simply to collaborate with the private sector on a concrete DLT application. So far, the project has yielded important mutual insights.
Overall, the Bank of Canada has gained a better understanding of how the private sector might interact with and adapt to such a system.
We learned a lot about issues that matter to participants, such as scalability, consensus mechanisms, legal issues, data privacy and transparency, as well as cybersecurity.
We’ve also gained some other important insights that will be relevant to the business case for this type of DLT application:
- Most cost savings appear unlikely to come in the core system itself, but rather more likely through reducing bank reconciliation efforts. The initial design is quite collateral intensive while the current system is already highly efficient.
- There's the potential for more savings if other applications could be built on top of a core cash payment distributed ledger system (eg financial asset clearing and settlement, trade finance).
- In an actual production system, trade-offs will need to be resolved between how widely data and transactions are verified by members of the system, and how widely information is shared.
- While DLT may aim to reduce concentration of risk, a substantial amount of centralization would still be required (eg permissioning of nodes and setting of operational standards) if applied to wholesale payments systems.
More generally, the Jasper experiment is helping us better understand the business imperative of those who provide and use financial services. It is crucial that financial institutions, new entrants and policymakers to work together to unlock the full promise of fintech.
As I said last June, together we can support a smooth evolution to tomorrow’s financial system – safe, sound and serving the people who rely on it.
Digital canada image via Shutterstock
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