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Straight Talk IT

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The Canadian central bank, Bank of Canada, has announced the conclusion of the second phase of Project Jasper, a public-private collaboration to explore the viability of using distributed ledger technology (DLT) as the basis for a wholesale payments system. While the project was a success in many respects, meeting the necessary levels of resilience more cost-effectively than through a centralized system proved to be a challenge. Ultimately though, Project Jasper has underlined the potential for DLT to play a potentially transformational role in the financial industry infrastructure in the future; the message is clear: "not yet" rather than "no."

Project Jasper began in 2016, as a collaboration between Bank of Canada, Payments Canada, R3, and the Canadian banks that are part of that consortium. The aim of the project was to build a proof of concept (PoC) to determine whether a model in which a central bank–issued settlement asset exchanged between participants via a DLT platform could provide a more efficient and effective solution than current centralized models.

In Phase 1, the settlement mechanism and underlying asset (DDR – digital depository receipts) were built on the Ethereum platform. Participants pledged collateral (cash) to the central bank, which funded a wallet for each of the participants with the equivalent value of DDR to be used for interbank payment settlement. At the end of each settlement period, the DDR in each participant's wallet was then redeemed by the Bank of Canada.

While this phase was successful in demonstrating the effectiveness of using a digital asset in a settlement process, there were challenges in using Ethereum. The proof of work (PoW) consensus protocol and visibility of the full ledger to all nodes were both highlighted as challenges. In Phase 2, the settlement mechanism was migrated to R3's Corda platform, which validates transactions between participants and relies on a notary (Bank of Canada, in this case) to ensure uniqueness (that each DDR can be used for only one transaction).

Crucially, Phase 2 also saw the development of an innovative liquidity savings mechanism (LSM) within the platform to minimize collateral requirements, in much the same way that LSMs work within current RTGS-based settlement mechanisms. Through an "inhale/exhale" routine on the platform, non-urgent payments are submitted to a queue for matching and are not immediately added to the ledger. At the end of the defined settlement period, payments are then matched and added in bulk to the ledger.

Overall, the Phase 2 PoC was successful in delivering against the requirements for credit and liquidity risk, as well as enabling irrevocable settlement. Concerns over scalability were also addressed following the move from Ethereum to Corda.

Despite these learnings, the Bank of Canada concluded that DLT as a standalone solution for a wholesale payments platform provides less overall net benefit than a centralized system. It's worth nothing that this is much the same conclusion that the Bank of England reached when reviewing DLT as an option for replacing the UK's RTGS system. One of the core project objectives was to understand whether DLT could improve the cost-effectiveness of delivering resilience by removing the single point of failure inherent in centralized models. However, the need for centralized functions such as the Bank of Canada's notary function and LSM reintroduces this risk. At the same time, decentralized nodes can also be viewed as individual potential points of failure. The costs of providing the necessary resilience to each node are therefore greater than maintaining the same level of resilience at a centralized level.

Project Jasper has been an important step forward for the industry in better understanding the potential of DLT to play a more important role in the financial infrastructure of the future. A key conclusion is that the benefits of DLT in interbank payments may be unlocked if the reach is extended across the broader ecosystem, such as through integrating other assets into the same ledger as payments (reducing back-office costs for institutions and simplifying sales of these assets).

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