A momentous development in digital currency was announced in a low-key way on Wednesday, at a Canadian payments conference.
In a panel discussion at Payments Panorama in Calgary, the Bank of Canada, the Canadian Payments Association and the Royal Bank of Canada said that they have been experimenting with a digital fiat currency called CAD-COIN.
Though the session was closed to the media, a photograph of the key slide outlining how the system works was circulated on Twitter by attendee Kyle Kemper, the executive director of the Bitcoin Alliance of Canada.
Sources close to the experiment emphasized that the Bank of Canada, which is Canada’s central bank, and the Canadian Payments Association do not currently have plans to issue a digital fiat currency. They said Carolyn Wilkins, the senior deputy governor for The Bank of Canada, will reveal more details about the experiment in a speech at Payments Panorama on Friday.
In a statement provided to Forbes, Wilkins said, “One of the bank’s many fintech research projects, discussed earlier this week by a panel at the Payments Panaroma conference, is to build a proof of concept wholesale interbank payment system using a distributed ledger, in conjunction with Payments Canada, R3 and Canadian banks. Experiments we are undertaking with DLT, such as this one, are confined to interbank payments systems. The Bank’s goal in these projects is solely to better understand the technology first-hand. Other frameworks need to be investigated, and there are many hurdles that need to be cleared before such a system would be ever be ready for prime time. None of our experiments are to develop central-bank issued e-money for use by the general public. These are still conceptual research questions that are being investigated by many central banks.”
The trial is the first instance of the creation of a national currency in a virtual environment, the use of it in transactions amongst the banks who are members of this blockchain, and the ability to conduct payments directly in the virtual environment. (According to CoinDesk, a Barbadian digital dollar, launched earlier this year, uses the Bitcoin blockchain instead of a private blockchain with pre-approved participants.)
While it is currently possible to trade any number of assets in a virtual environment, whether shares in a company or land titles, at some point, the two parties in a transaction have had to go “off-ledger” or out of the virtual environment to transfer actual money. This experiment now makes it possible to actually transfer that value on the blockchain.
The slide outlines a process by which a participant on the platform pledges cash collateral into a special account at the central bank, which then converts that value into CAD-COIN and delivers it to the participant’s account. The members of the network, who have to be approved, exchange the CAD-COIN, and when one wants to convert to another currency, it can redeem the CAD-COIN for cash collateral and the central bank will destroy that amount of CAD-COIN.
Sources confirmed that the participants in the experiment include “the big five” banks of Canada — Bank of Montreal, Canadian Imperial Bank of Commerce (CIBC), RBC, Toronto-Dominion Bank (TD Bank) and Scotiabank.
The experiment is being run by global bank consortium R3CEV, which counts all five of those banks as members. According to Kemper, the panelists, who included Grahame Johnson of the Bank of Canada; Jan Pilbauer, of the Canadian Payments Association; and Carolyn Burke of RBC, gave a demonstration with CAD-COIN, showing how the money can be transferred using Ethereum.
“The central bank is really innovating here, but it’s innovating in cahoots with the largest banks in Canada first as a project but ultimately this can be the CAD-COIN,” says Kemper. He also added that this was a first step in the “blockchain-ification” of banks.
The news comes just two weeks after a number of blockchain startups presented to Federal Reserve chair Janet Yellen and 100 central bankers from around the world at an event hosted by the International Monetary Fund and the World Bank. One presentation, by Adam Ludwin, chief executive of blockchain enterprise company Chain, which he later posted on Medium, explained why he believes central banks will someday issue digital currency. It also come after the Bank of Tokyo-Mistubishi UFJ confirmed it is experimenting with a digital currency on the blockchain and will release a virtual currency — however, not a digital fiat currency — next year.
The idea of digital fiat currency has been bandied about by the cryptocurrency community but has not yet been widely accepted. Many still haven’t conceived of the idea of fiat currencies that can be issued digitally.
In September, at Consensus 2015, the largest Bitcoin/blockchain conference, when Chain’s Ludwin was asked what the government could do to spur the development of blockchain technology, he answered “issue U.S. dollars on a blockchain.”
At the time, the idea seemed so absurd the audience and other panelists laughed, but he predicted they would react differently in a year’s time. Nine months later, it seems the formerly outlandish notion could someday be reality.
By laura shin women@farbes
FORBES