In its experiment with distributed ledger technology (DLT), the Bank of Canada has found that the technology is currently not ready to underpin the wholesale interbank payment system.

Writing for Globe and Mail, Carolyn A. Wilkins, senior deputy governor of the BoC, and Gerry Gaetz, president of Payments Canada, said that the central bank, along with Payments Canada, major Canadian banks, and technology consortium R3 last year started a project – codenamed ‘Jasper’ – aiming to build and test an experimental wholesale interbank payment system, using DLT.

“Our experiment, done in two phases, demonstrated that it’s indeed possible to settle wholesale payments on a distributed ledger. Our work also found that such a system could meet some, but not all, of the core international principles for financial market infrastructure. In the second phase of the project, we even successfully incorporated an innovative liquidity savings mechanism – a queuing process that greatly increases efficiency by allowing institutions to net some of their payments. And while cost savings wouldn’t likely come from the core system, distributed ledger platforms could potentially enable savings by lowering back-office reconciliation costs”, they wrote.

However, Wilkins and Gaetz pointed out to a number of gaps and fundamental challenges with the technology. These include:

• Privacy constraint: This relates to incompatibility of some versions of decentralized digital ledgers with the need for privacy around transactions in wholesale payments systems. Wilkins and Gaetz said that while this issue was addressed in the second phase, “the fix made the system susceptible to the risk of a single point of failure – something present in current systems but that was supposed to disappear with distributed ledgers.”
• Scalability Issue: Wilkins and Gaetz noted that although some versions can achieve greater transaction rates by moving away from a fully decentralized framework, this can reduce resiliency and lessen some of the expected potential cost savings.

“The bottom line is that a stand-alone DLT wholesale system is unlikely to match the efficiency and net benefits of a centralized system. In fact, at its heart, there exists a fundamental inconsistency or tension between a centralized wholesale interbank payment system, as we have now, and the decentralization inherent in DLT”, they added. “Our present view is that the biggest net benefits, if any, would likely lie in the interaction of a DLT-based wholesale payments system with broader financial market infrastructure.”

They concluded saying that while a lot of innovation and collaboration would be involved in modernizing Canada’s payments system in the short term, it would not involve distributed ledgers.