Bank of Canada reveals three digital currency proposals

In 2020 Bank of Canada (BoC) ran a university competition, the Model X Challenge, to design a hypothetical central bank digital currency (CBDC). All three approaches suggest an account-based solution, although two of them additionally advocate for a tokenized layer, according to Ledger Insights.

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 is 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.

University of Calgary students felt that there was some tension with some of the design goals set out by the BoC; for instance, ‘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 like banking but with the addition of smart contracts. Cash+ involves anonymised tokens. Legal compliance is enforced when someone converts money from Banking+ to Cash+.

University of Toronto and York University suggest a two-stage approach for introducing the CBDC, which also consists of two layers. Firstly, there would be a centralised 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 to act as a layer on top of the centralised solution. 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.

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