In an assessment of its latest phase of blockchain experimentation, Payments Canada found that while distributed ledger technology (DLT) shows promise in terms of its ability to deliver efficiency improvements, a significant expansion of the scope of coverage of the ledger to include additional assets and the full trade and post-trade life cycle may be required to realize these benefits.
Jasper III was commissioned by Payments Canada, TMX Group, and the Bank of Canada in collaboration with delivery partners Accenture and R3. The project involved a hands-on exploration of settlement and payment interactions in a private distributed ledger network by building and testing a proof-of-concept (POC) system that was connected to the existing market infrastructures. It expanded upon earlier phases to broaden the DLT ecosystem beyond wholesale payments to include securities settlement for TSX-listed equities.
Securities and cash were brought on-ledger through the issuance of Digital Depository Receipts (DDRs) by CDS and the Bank of Canada, respectively, allowing POC participants to settle securities against central bank cash on the distributed ledger. Equity and cash DDR could be redeemed immediately after their transfer since settlements were final and irrevocable.
Several key features of the DLT platform showed promise during the POC experiment: financial market infrastructures were effectively integrated through a “loose coupling”; independent rules and conditions of token issuers were enforced on the ledger, allowing the DDR to be transferred “freely” in a shared ledger environment; participation restrictions were enforced through a private ledger and doorman service; and real-time ledger visibility was granted to market infrastructure and observer/regulatory nodes as required.
The POC introduced a credit extension process for broker participants that are not members of the payments system to access cash DDR on-ledger. This allowed these brokers to participate in the POC, and mirrors the need for brokers to receive credit from credit extenders in the current system. The introduction of credit extension in the POC, however, reintroduced credit risk in a DVP-1 model (real time gross settlement system) that held promise for eliminating it.
DLT-based models that experiment with more fundamental departures from the current settlement process and market infrastructures ecosystem may be more likely to demonstrate operational cost savings and reduced back-office reconciliation efforts.