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Central Bank Crypto Could Bring Economic Gains: Bank of Canada Paper

Central bank-issued cryptocurrency can potentially bring economic welfare gains for Canada and the U.S., according to a central bank researcher.

In a working paper published Thursday, the Bank of Canada’s S. Mohammad R. Davoodalhosseini states that introducing a central bank digital currency (CBDC) “can lead to an increase of up to 0.64 percent in consumption for Canada and up to 1.6 percent for the US, compared with their respective economies if only cash is used.”

At the moment, Davoodalhosseini says, a key question to the “many” central banks currently mulling the option of issuing a CBDC is whether cash and a digital form of fiat currency should co-exist, and if so, how to maintain an “optimal” monetary policy.

Based on detailed modeling and mathematical calculations, the researcher argues in the paper that a country’s economic welfare – at least for Canada and the U.S. – might be better off by substituting cash with a CBDC, provided implementation is not extremely costly.

He wrote:

“Having both cash and CBDC available to agents (consumers) sometimes results in lower welfare than in cases where only cash or only CBDC is available. This fact suggests that removing cash from circulation may be a welfare-enhancing policy if the motivation to introduce CBDC is to improve monetary policy effectiveness.”

The paper further states that, by introducing a CBDC, central banks could have a higher level of flexibility in adjusting current monetary policy.

“This is because the central bank can monitor agents’ portfolios of CBDC and can cross-subsidize between different types of agents, but these actions are not possible if agents use cash,” it says.

The paper’s quantitative approach follows a previous December 2017 effort by other researchers from Canada’s central bank to gauge the value of offering a CBDC over cash – work that took a more qualitative look at the pros and cons.

CoinDesk reported at the time that the researchers argued that the potential benefits of a CBDC may vary between developed and developing economies.

Bank of Canada image via Shutterstock

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85% Of Canadians Are 'Aware' Of Bitcoin, Says Bank of Canada

The number of Canadians who own bitcoin nearly doubled over the course of a year, according to the results of a newly-published survey by the Bank of Canada.

Dubbed the Bitcoin Omnibus Survey (BTCOS), the country’s central bank hoped to identify “the driving reasons for ownership during the sudden rise in Bitcoin prices” and in understanding “bitcoin’s potential impact on how the Bank of Canada undertakes its core functions,” according to the analytical note presenting survey results.

Having conducted a similar survey back in 2016, the analysis found that there was increased interest in bitcoin’s price over the year. The results further show that ownership among Canadians rose from 2.9 to 5 percent and overall awareness of the cryptocurrency jumped up to 85 percent.

The survey brought together voices from over 2,500 Canadians across the country, with the majority French-speaking province of Quebec seeing the largest increase in awareness of bitcoin. The population aware of bitcoin rose over 20 percent during the year.

In addition, the results show a significant improvement in general understanding about bitcoin with the proportion of Canadians believing bitcoin is “government-backed” falling about 40 percent from the previous survey. Further, the new set found that roughly half of Canadians who own bitcoin do not use it to transact, but rather, hold the coins “as an investment.”

The timing of the survey is notable, given that December of last year saw the price of bitcoin spike to nearly $20,000.

Charts image via Shutterstock

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Money20/20: Central Bank Execs Conclude Crypto Is No Threat to Fiat, Yet

Representatives from multiple central banks discussed whether or not cryptocurrency could spell the end of fiat currencies during the Money20/20 conference in Amsterdam today, June 5.

During a panel talk titled “Cryptocurrency, the Central (Bank) Question”, representatives from the Swiss National Bank, the Bank of Lithuania, the Bank of England, and the Bank of Canada took turns responding to the question “Can cryptocurrencies spell the end of fiat currencies?”.

Bank of Canada executive James Chapman stated that cryptocurrencies are only a threat to fiat currencies in a “situation of hyperinflation”. Thomas Moser, an alternate member of the governing board at the Swiss National Bank, agreed with Chapman, adding that they are also a threat when a currency “is not performing well.” Moser also noted:

“As long as central banks do a good job, there is no real for central banks to disappear.”

Moser mentioned during the panel that “cryptocurrency is very well tolerated in Switzerland so far.” The country, and in particular its Zug “Crypto Valley,” has been touted by some as an attractive place for crypto companies, due to its balanced approach to Initial Coin Offerings (ICO) and its status as a crypto tax haven.

Martin Etheridge, Head of Division at the Bank of England, called the question of what a currency is and how important cryptocurrencies will be in society “totally relevant.” Addressing the question at hand, Etheridge said he doesn’t “see much prospect of the current iteration of crypto assets in replacing fiat currencies,” though he added “who knows what the future will hold.” He concluded:

“[But] I think the odds are stacked very much in favor of fiat currencies. I think it would take a pretty fundamental shift of public perception or the existing market system for it to happen.”

At the end of June, Bank of England governor Mark Carney said the bank was open to the idea of a central bank-issued digital currency, but added that the adoption of digital currency won’t happen soon and that cryptocurrencies are not currently considered money.

Dr. Marius Jurgilis of the Bank of Lithuania clarified that a central bank-issued cryptocurrency and a cryptocurrency are two separate things, adding that the main product of central bank is “a matter of trust”:

“If our product is good, we don’t need to talk about the cryptocurrencies. It’s a matter of trust […] but if the society starts questioning, or it if it thinks that the things we are selling could be got in a cheaper, more convenient way, other things will appear.”

However, Jurgilis did mention that the bank is not “sitting entrenched in our positions,” but that they are hesitant to let something in that “could lead to a major collapse of trust.”

In mid-April, Lithuania’s central bank reportedly began looking into cryptocurrencies, initiating a roundtable with members from commercial banks, government regulators, as well as crypto traders.

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Bank Of Canada Says Blockchain Effective For Securities Settlements, Questions ‘Benefits’

Canada’s central bank, Toronto Stock Exchange operator TMX Group, and non-profit organization Payments Canada, completed tests showing blockchain can be used for instantaneous securities settlements, Reuters reports today, May 11.

The three companies concluded that blockchain, the technology originally developed for cryptocurrencies such as Bitcoin (BTC), is usable for automating securities settlements in real time. Both cash and assets can effectively be “tokenized” for instant exchange. Gerry Gaetz, president and CEO of Payments Canada, told Reuters:

“This shows that it is possible to deliver payments in a way that has never been done before – by directly swapping cash from buyers to sellers, resulting in instant settlements.”

The blockchain pilot, dubbed “Project Jasper,” was first announced in 2016, and its latest phase launched late last year. However, Bank of Canada Senior Special Director Scott Hendry, has voiced doubt as to the advantages the system could offer in terms of cost savings. Reuters quotes Hendry at a conference in Toronto on Thursday as saying:

“We’re still uncertain after doing this work that there are significant savings possible for participants. It’s not clear that all the participant dealers and banks are going to get a significant benefit out of this settlement system.”

This week, a pilot of Ripple’s Xrapid liquidity solution for its blockchain-powered real-time gross settlement system received positive results from financial institutions, who reported transaction savings of 40-70 percent and improved transaction speeds. JPMorgan has also just filed a patent in the U.S. for a peer-to-peer payments network, which would use blockchain technology for intra- and inter-bank settlements.

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Bank of Canada's DLT Trial Shows Instant Securities Settlement Possible

The latest “Project Jasper” blockchain trials have shown that distributed ledgers are effective at automating securities settlements in real-time, according to Bank of Canada and two partners on the project.

Announced in October 2017, the latest stage of the research effort moved on from its previous focus on payments to a proof-of-concept for “an integrated securities and payment settlement platform,” CoinDesk reported at the time.

Working alongside the central bank were TMX Group, the financial services firm that operates the Toronto Stock Exchange, and Payments Canada, a non-profit that operates the primary payment channels within the country.

Now, a Reuters report published on Friday indicates that the three partners have found that, following tests of the platform, both assets and money can be tokenized and exchanged instantly, the report says.

Gerry Gaetz, president and CEO of Payments Canada, was quoted as saying:

“This shows that it is possible to deliver payments in a way that has never been done before – by directly swapping cash from buyers to sellers, resulting in instant settlements.”

There is a caveat, however. While blockchain is often touted as a way for enterprises to cut costs by removing middlemen and bringing in new efficiencies, the partners indicated that using the tech to settle securities transactions may not be such a money-saver.

Scott Hendry, senior special director at Bank of Canada, was quoted by Reuters as telling conference attendees yesterday:

“We’re still uncertain after doing this work that there are significant savings possible for participants. It’s not clear that all the participant dealers and banks are going to get a significant benefit out of this settlement system.”

Bank of Canada image via Shutterstock

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MIT Comes Up With Three Ways To Take Bitcoin Down

The MIT Technology Review has published an article today, April 24, called “Let’s Destroy Bitcoin,” detailing three ways that the cryptocurrency could be “brought down.”

The first option, according to the article, is a government takeover of Bitcoin with the creation of a Federal Reserve-backed coin (Fedcoin):

“The year is two-thousand-something-big, and it’s the day your taxes are due. But you don’t file them. Instead an algorithm automatically makes a withdrawal from your electronic wallet, in a currency called Fedcoin.”

This new blockchain would have verified financial institutions as the authorized nodes instead of peer-to-peer networks, “basically, trusted institutions,” Yale undergrad Sahil Gupta told the MIT Technology Review. The article notes that the Bank of Canada built a simulation of such a system on Ethereum (ETH) in 2016.

Option two is a Facebook stealth takeover of Bitcoin, which involves the social media site creating a BTC wallet for all of its users, rewarding them in the cryptocurrency for interacting with ads, and giving them an ad-free experience if they let Facebook mine on their computer’s unused power (as Salon offered earlier this year):

“If Facebook could persuade a large enough fraction of Bitcoin users and miners to run its own proprietary version of the Bitcoin software, the company would thereafter control the rules. It could then refashion Bitcoin as a corporate version of the Fedcoin described above.”

Facebook could also take control away from Bitcoin by issuing their own cryptocurrency, just like messaging app Telegram is in the process of doing after their combined $1.7 bln Initial Coin Offerings (ICO) held earlier this year.

The third way of making Bitcoin “irrelevant” is the creation of multiple new cryptocurrencies for every situation:

“You’re in the checkout line at the grocery store. Inside your phone’s digital wallet you find not only Fedcoin and FacebookCoin but also AppleCash, ToyotaCash, and a coin specific to the store you’re standing in. There’s also a coin redeemable for babysitting services, and another that gets you rides on your local subway system.”

This option, according to MIT Technology Review, is “already happening,” as companies are creating their own coins or tokens to be used just for their services, like Kodak’s ICO to form a currency used to license photographs.

How Bitcoin can prevent any of these options from taking place is to capitalize on its advantages, namely that “Bitcoin transactions are anonymous and impossible to censor.”

However, the article notes that the US National Security Agency (NSA) is already attempting to link people’s identities with their BTC addresses, according to documents leaked by Edward Snowden, and if governments “seek to create and enforce blacklists,” they could pressure the “crucial” BTC miners.

At the end of March, Snowden had said in an interview that Bitcoin’s Blockchain ledger was “devastatingly public” and that a good alternative to fiat that cannot be controlled by the government has not yet appeared.

MIT Technology review concludes that “if cryptocurrencies are to be widely used, it will be the habits of the masses, not the wishes of Bitcoin’s early adopters, that determine what becomes of Satoshi Nakamoto’s vision.”

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JPMorgan Trial Puts Debt Issuance on a Blockchain

JPMorgan Chase has partnered with National Bank of Canada and other major firms to trial a blockchain platform aimed to improve the debt issuance process.

As reported by Reuters, the investment bank said in a statement Friday that trial, which took place on on Wednesday, mirrored a $150 million offering the same day by the the National Bank of Canada of a one-year floating-rate Yankee certificate of deposit.

The trial also saw participation from Goldman Sachs Asset Management, Pfizer, Legg Mason Inc’s Western Asset and others.

David Furlong, senior vice president of blockchain at National Bank of Canada, said in a statement that blockchain technology “has the potential to bring about major change in the financial services industry.”

Based on JPMorgan’s Quorum blockchain, the debt-issuance platform took over an year to build, according to the report.

As reported by CoinDesk in March, JPMorgan is currently mulling spinning off the Quorum project as an independent company.

A spokesperson for the bank declined to comment on what they called “speculation” at the time, but said that “Quorum has become an extremely successful enterprise platform even beyond financial services and we’re excited about its potential.”

However, Umar Farooq, head of blockchain initiatives for JPMorgan’s corporate and investment arm, confirmed the move to Reuters, saying that discussions are in the early stages and the bank has noted interest from financial institutions in the project.

The open-source Quorum blockchain was launched in 2016 as a permissioned version of ethereum.

In October 2017, Quorum notably integrated the zero-knowledge security layer (ZSL) from privacy-focused public blockchain zcash.

The technology obscures all identifiable information about a transaction but still provides the ability to audit those transactions.

JPMorgan image via Shutterstock

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Bank of Canada Paper Weighs Central Bank-Issued Cryptocurrency

Central banks might benefit from issuing cryptographic versions of fiat currencies, but the benefits would vary depending on whether they did so in an advanced or developing economy.

At least that’s according to Ben Fung from the Central Bank of Canada and Walter Engert from the Office of the Superintendent of Financial Institutions, both of whom published a paper this week discussing the pros and cons for central banks issuing cryptocurrencies.

Notably, the paper ends on the question of whether it’s worth it for such institutions to offer cash or central bank digital currency (CBDC), should such demand drop deeply enough, though it ties the query to the idea this would need to come at the expense of cash use.

It reads:

“Is it sufficient for a central bank to supply only reserves to qualified financial institutions? Put differently, is a ‘cashless society’ a sound outcome?”

The paper explores six different supposed benefits to a central bank for issuing a digital currency, but largely dismisses all but three: payments for consumers, financial inclusion and stability.

For consumer payments, the authors write that a “CBDC would facilitate transactions that are currently foregone because of frictions that inhibit some types of transactions.” In particular, it would reduce friction for online payments and entice smaller merchants to offer services over the internet. In some economies, they also see benefits in reducing costs for retail payments to consumers.

The authors argue that financial inclusion would only really benefit in developing economies, though it cites several other existing solutions around the world (such as Africa’s M-PESA system) that seem to be closing the gaps just as well as digital currency could.

“Financial inclusion does not provide a compelling motivation for CBDC in most advanced economies, including Canada,” they write.

Lastly, the paper gives mixed results for improved financial stability.

On the one hand, “the financial systems in Canada and other countries feature highly levered banks conducting liquidity and maturity transformation and operating at the core of the payment system,” the authors write. “It is well known that under some conditions this set-up can be unstable, and in severe cases the stock of inside money can contract, with adverse negative externalities for the economy.”

Digital money would give consumers a largely risk-free way to store money without exposure to that risk. On the other hand, the ease of leaving bank deposits for a fiat crypto could accelerate financial turmoil.

The paper also briefly considers the potential for an interest-bearing digital instrument, which would give central banks another way to influence short-term interest rates. The paper represents the views of its writers and does not necessarily reflect that of the Central Bank of Canada.

Canada tile flag via Shutterstock.

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Bank of Canada Announces Phase 3 of 'Project Jasper' DLT Trial

Canada’s central bank is embarking on the next phase of its ongoing “Project Jasper” distributed ledger research initiative.

In addition to the Bank of Canada, Payments Canada – which operates the primary payment channels within the country – and exchange operator TMX are also taking part. An as-yet-undecided “vendor” will contribute, and the selection process is already under way, according to statements.

Project Jasper has been framed by Bank of Canada as a way to explore various uses of distributed ledger tech, and to date has focused primary on settling payments. The new phase will focus on the creation of an “integrated securities and payment platform.” The proof-of-concept will focus on both the clearing and settlement of securities transactions.

Carolyn Wilkins, senior deputy governor of the Canadian central bank, said of the new phase:

“Our involvement in this effort to explore potential ways to modernize the securities settlement process is a good example of how the Bank of Canada promotes the efficiency and stability of the financial system. A better settlement process would not only reduce the cost of securities transactions, but also support financial system resiliency, especially in periods of stress, through faster settlement times and reduced settlement risk.”

It was in June 2016 that officials at the central bank debuted the so-called “CAD-coin,” and late last month, those involved with the initiative released a white paper detailing the work done thus far.

Image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.