20 August 2017
Find out more

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

05 April 2017  |  9271 views  |  0 US Coin Cash

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)

Comment on this story (membership required)

Finextra news in your inbox

For Finextra's free daily newsletter, breaking news flashes and weekly jobs board: sign up now

Related stories

G20 urged to set up central bank blockchain consortium

G20 urged to set up central bank blockchain consortium

20 March 2017  |  10430 views  |  0 comments | 19 tweets | 21 linkedin
Fed governor cautions on central bank-issued digital currencies

Fed governor cautions on central bank-issued digital currencies

06 March 2017  |  7818 views  |  1 comments | 11 tweets | 10 linkedin
Private digital currencies need regulation to flourish - Bank of Canada research

Private digital currencies need regulation to flourish - Bank of Canada research

20 February 2017  |  10872 views  |  0 comments | 12 tweets | 10 linkedin
Bank of Canada DLT experiment raises PFMI questions

Bank of Canada DLT experiment raises PFMI questions

13 February 2017  |  14052 views  |  0 comments | 6 tweets | 10 linkedin
Chinese central bank tests digital currency system

Chinese central bank tests digital currency system

26 January 2017  |  11971 views  |  0 comments | 27 tweets | 24 linkedin
Central bank digital currency could boost GDP - BofE

Central bank digital currency could boost GDP - BofE

19 July 2016  |  6713 views  |  0 comments | 17 tweets | 11 linkedin
Bank of Canada trials blockchain-based digital dollar

Bank of Canada trials blockchain-based digital dollar

16 June 2016  |  15392 views  |  3 comments | 33 tweets | 33 linkedin
Distributed ledger tech could see Brits get Bank of England accounts - deputy governor

Distributed ledger tech could see Brits get Bank of England accounts - deputy governor

02 March 2016  |  7999 views  |  0 comments | 17 tweets | 15 linkedin
Fed researcher sets out vision for government cryptocurrency

Fed researcher sets out vision for government cryptocurrency

06 February 2015  |  20211 views  |  5 comments | 28 tweets | 20 linkedin

Related company news

 

Related blogs

Create a blog about this story (membership required)
visit www.dorsum.euvisit www.niceactimize.comvisit www.worldpaymentsreport.com

Top topics

Most viewed Most shared
Mobile contactless spending accelerating in UKMobile contactless spending accelerating i...
9028 views comments | 23 tweets | 23 linkedin
Norwegian banks and startups form fintech clusterNorwegian banks and startups form fintech...
7858 views comments | 19 tweets | 23 linkedin
RBS to bring Silicon Valley to EdinburghRBS to bring Silicon Valley to Edinburgh
7266 views comments | 10 tweets | 7 linkedin
hands typing furiouslyWhy Blockchain Might Not Be The Future For...
6479 views 1 | 5 tweets | 3 linkedin
Apple sidelined as Beijing transit system launches payments appApple sidelined as Beijing transit system...
6346 views comments | 11 tweets | 9 linkedin

Featured job

Find your next job