Last year the Bank of Canada (BoC) ran a university competition, the Model X Challenge, to design a hypothetical central bank digital currency (CBDC), or “digital loonie” in Canadian parlance. Today the top three Universities published their proposals.
All three approaches suggest an account-based solution, although two of them additionally advocate for a tokenized layer.
Below is a very high-level summary of papers that were each around 50 plus pages in length.
McGill privacy proposals
McGill University presented a solution to address privacy issues around a CBDC. In its view, an account-based model has advantages but suffers from privacy issues compared to anonymous tokens because every transaction can be tracked. That’s good for anti-money laundering but seems invasive compared to cash. Conversely, tokens are far harder to track and can present money laundering and tax avoidance issues.
It suggests a P-Hybrid CBDC, where P is for privacy, that only tracks transactions on the recipient’s side. So the person making the payment would convert money from their account into anonymized tokens and make a payment. However, a recipient, in many cases a business, would be fully identified and a clear record of their transactions is available.
University of Calgary proposes two-tiers
Calgary students felt that there was some tension with some of the design goals set out by the BoC. Those requirements were security and privacy, universal access, resiliency and robustness, legal compliance and performance and scalability.
It noted that “unrestricted anonymity is at odds with legal compliance for anti-money laundering regulations.”
The proposal from Calgary is a two-tier approach. It suggests Banking+, an account-centric version of CBDC that is similar to banking but with the addition of smart contracts. Cash+ involves anonymized tokens. Legal compliance is enforced when someone converts money from Banking+ to Cash+.
University of Toronto & York University two-stage approach
While Calgary proposes a two-layered structural approach, these two universities suggest a two-stage approach for introducing the CBDC, which also consists of two layers. Firstly there would be a centralized account-based solution. Any payments are between fully-funded digital currency wallets. But connectivity to existing payment rails would be enabled via APIs.
In a second phase, there would be a permissioned blockchain to enable smart payments. This would act as a layer on top of the centralized solution and provide financial institutions with opportunities to participate and earn from it.
The two universities propose a national digital identity initiative where all wallets will go through an e-KYC process. But in terms of transactions, it will use a quasi-anonymous identifier.
The Bank of Canada was one of the earlier banks to explore a CBDC through Project Jasper. It has not decided to proceed with a digital currency but wants to be prepared if it needs to. If either Diem / Libra launched or the U.S. issued a CBDC, there’s a sovereignty risk that the U.S. dollar could usurp the Canadian dollar.