The Bank of Canada is collaborating with five Toronto-based Canadian banks, among other partners, to explore the possible development of a payment system using distributed ledger technology (DLT), the technology behind the digital currency, Bitcoin.
Carolyn Wilkins, senior deputy governor, referred to the initiative in a speech made at a payments conference in Calgary on Friday.
Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, the Bank of Nova Scotia and Toronto-Dominion Bank are currently partners in the project. Ottawa-based Payments Canada and R3, a New York-based consortium of financial institutions dedicated to the design and delivery of DLT systems, are also involved.
The experimental project is part of an “ambitious research agenda” on the part of the central bank that will be an opportunity to deepen its understanding of DLT’s mechanics, limits, risks and possibilities, according to Wilkins.
Upgrades to the core payment systems that the Bank of Canada oversees are currently a priority for the institution, says Wilkins: “Now is the time to make our core systems more efficient and competitive.”
Wilkins also spoke of the need for key participants in the financial system to work together to understand the benefits of financial technology, or fintech. However, they also need to guard against potential hazards, such as operational and financial risks.
“By working together, we can unlock the full promise of fintech to ensure a smooth evolution to tomorrow’s financial system—safe, sound and serving the people who rely on it,” Wilkins said.
Authorities should assess these new technological developments in light of their impact on consumer protection, financial inclusion, market integrity, competition policy and financial stability, she added. “Authorities should support innovation, but the bar will be high, especially for core financial services, and appropriately so,” she added.
Wilkins also predicted that fintech would lead to an evolution in the financial services industry, as opposed to the more dramatic revolution that others are forecasting. Change is being motivated by customer demand, the entrance of large non-financial players and the inefficiency of some financial services, which is opening the door to competition, she said.
However, incumbent financial institutions will adapt, new players will enter the industry and those with strong business models will survive, Wilkins said.
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