The Bank of Canada is testing its own distributed ledger technology in conjunction with private sector participants, senior deputy governor Carolyn Wilkins said on June 17.
In a speech in Alberta, the deputy governor spoke of the changing fintech landscape, focusing on distributed ledger technology, which has gained much attention in recent months as financial institutions explore its potential to reshape their payments systems.
The Bank of Canada is partnering with Payments Canada, Canadian banks and R3 (which leads a global consortium of financial institutions) to test distributed ledgers, Wilkins said.
"Our only goal at this stage is to understand the mechanics, limits and possibilities of this technology," she said. The bank's experiments currently include a simulated "settlement asset" used as a medium of exchange within the system, which the bank has called CAD-coin.
"It is very much like the settlement balances in [the large-value transfer system], except it is using DLT [distributed ledger technology]. Because it cannot be used anywhere else, it is a different animal altogether from a digital currency for widespread use," Wilkins said.
A distributed ledger is a type of database that is spread across multiple sites, and therefore does not require connection to a central hub in the way that standard real-time gross settlement systems do.
Distributed ledger technology has the "potential to replace the entire transaction system", Wilkins said, including core payment systems. The technology can also offer new products such as 'smart contracts', which are written in computer code and do not need human intervention to be executed.
Wilkins acknowledged the technology could take the financial industry into "uncharted territory", noting there were still a number of "hurdles to clear" before it could be rolled out more widely.
"The decentralised aspect of the technology is why some predict that widespread application of DLT could revolutionise entire industries. They contemplate alternative futures, such as one in which there is complete disintermediation of banks and even central banks, with state currencies being replaced by decentralised digital currencies," Wilkins said.
However, the deputy governor noted this was "highly unlikely", as currencies such as bitcoin cannot "outshine" the competition when it comes to serving as a store of the value and a medium of exchange.
Nevertheless, she said the Bank of Canada would still be studying digital currencies closely, because of its role in issuing the nation's currency and the implications these currencies could have for monetary policy and financial stability.
"I cannot think of a better way to understand how this technology actually works than to roll up our sleeves and build something with the private sector," she said.