Mod Blog: Preparing Canada’s payments systems for the blockchain revolution, and why you should be paying attention

March 21, 2018

By Andrew McCormack, Senior Director, Technology, Payments Canada.

It’s hard to ignore the buzz around cryptocurrencies, when on a daily basis we’re captivated by headlines that talk about the booms and busts of this new and unfamiliar marketplace. Economists are evaluating this extremely volatile market and governments are rushing to craft legislation to regulate this space. But behind the crypto-mania, there’s a also an important story about the underlying technology: blockchain.

In 2008, blockchain was introduced with the cryptocurrency Bitcoin. This technology enables the secure validation and recording of transactions on a distributed ledger, which is a database shared between multiple parties. The defining feature of distributed ledgers is that authorized parties can share identical versions of the data without needing a centralized database or administrator. To quote Richard Gendal Brown from R3, “enterprise blockchain technologies solve the ‘I know for sure that what I see is what you see’ problem”. It must be noted that blockchain is a foundational technology, much like TCP/IP was for the internet. This technology has immense potential not only because it enables digital cash for peer-to peer payment transactions, but because - in theory - it could be extended to almost any transaction class and create entirely new business models.

Before rushing off to create new business models, I believe it’s important to recognize that this transformational journey has just started. Meaning that we’ll need to walk before we can run. At Payments Canada, the journey began in March 2016 with the launch of an experimental project called Project Jasper. Working in partnership with the Bank of Canada, R3 and Canadian commercial banks that are members of the R3 consortium, Jasper has already completed two phases of activity.

During the first phase, a distributed ledger prototype was built to investigate the use of a central bank-issued inter-bank settlement token - this essentially acted as cash. At the end of the second phase in May 2017, we concluded that while blockchain has immense potential it doesn’t yet provide an overall net benefit relative to our current centralized systems. Phase ll’s findings included an acknowledgement that enterprise blockchain platforms like Corda have made significant advances in terms of privacy and confidentiality, security, scalability and programmability.

In the third phase of Project Jasper, we are working with the TMX Group to expand our blockchain proof-of-concept to include clearing and settlement of securities. The project team is building an integrated financial market infrastructure with the goal of reducing equity trade settlement from days to minutes, and optimizing the collateral requirements for market participants. I also believe there are many learnings that can be found in how other sectors are exploring its use such as healthcare, domestic and international trade, and even the music industry - unlocking the potential of creating a common database of health information, automatically reconciling payments for goods as soon as they’re delivered, or even allowing musicians to monetize their work without relying on industry gatekeepers.

So yes, you'll be hearing about blockchain a lot more. because it's not just a buzzword - it has the potential to transform business in the payments industry and beyond.

For more information on Project Jasper, check out the Bank of Canada’s report here. You can also see the results of Jasper Phase ll. Stay tuned to payments.ca for more information on the next phase of Jasper and for all the latest payments news.