CAD-coin V Fedcoin: The future of central bank digital currencies

CAD-coin V Fedcoin: The future of central bank digital currencies

An R3 academic paper on central bank digital currencies (CBDCs) investigates the relative merits of a public network-based retail Fedcoin option and the private, permissioned wholesale CAD-coin alternative.

With central banks around the world exploring the introduction of CBDCs, two different models have emerged: the CAD-coin, where a central bank issues a currency against some of its assets, and the Fedcoin, where a central bank issues a new type of currency that becomes a liability on its balance.

First envisioned by Canadian economist JP Koning and later picked up by the Federal Reserve Bank of St Louis' David Andolfatto, Fedcoin would be a government-backed currency - a cash alternative - that uses a bitcoin-style protocol but the US dollar as the monetary object, combining the best of cryptocurrencies and cash.

CAD-coin is a wholesale payments option that is being looked into by the Bank of Canada with the country's biggest banks, Payments Canada and the R3 consortium. The system sees participants pledge cash collateral into a special pooled account held by the BoC, which then converts it to generate the CAD-coin, which is transferred to fund participants' accounts. Then identifiable counterparties can exchange assets on the CAD-Coin platform and redeem the digital currency for cash collateral, with the BoC destroying the redeemed CAD-coin.

In an R3 paper, Rod Garratt from the University of California Santa Barbara, who worked on the Bank of Canada's Project Jasper, sets out what the CAD-coin experiment achieves. It is not, he says, an improvement in payments processing - in fact "it is actually a step backwards".

However, it does demonstrate that central bank money can be transferred using DLT, which is crucial because it enables settlement, which is difficult to do.

"The CAD-coin shared ledger reflects real-time, accurate account balances for each participant and these balances are also synonymous with the ownership of funds. Hence, the CAD-coin shared ledger simultaneously achieves clearing and settlement," he writes.

Explaining the differences between fedcoin and CAD-coin, Garratt writes: "Fedcoin is intended as a retail payment solution, while CAD-coin is intended as a wholesale payments solution: it does not trade on a public network, nor is it consumer facing. Fedcoin would be issued onto a public ledger by the central bank and would be convertible one-to-one for USD. CAD-coin are also issued by the central bank, but they represent deposit receipts that are backed by central bank money."

Both options pose problems, such as the potential for bank runs, and Garratt concludes with a note of caution: "The case for adopting DLT, which is still evolving as improvements in the technology develop, must be based on improved operational efficiencies, increased resilience and cost reductions. It is important to recognise that distributed data systems have been around for quite some time and these systems do not require blockchain and proof of work.

"It is therefore incumbent upon us to evaluate whether the benefits of proof-of-work style protocols warrant the reduction in efficiency and to consider alternatives."

Read the full paper:

Download the document now 287.3 kb (PDF File)

Comments: (0)