Digitization has been the root of several changes in the way we have traditionally done things, which includes new realms such as online banking and the rising popularity of cryptocurrencies. This begs the question: can we introduce digital-cash as a monetary currency and can it exist in our current fiat-currency dominated market?
As part of the Bank of Canada’s Model X Design Challenge, students and faculty from Osgoode and the University of Toronto (UofT) are working alongside one another to design a way to make this possibility a reality. “We are recommending the implementation of a brand new currency/payment system, which obviously raises a number of legal issues and policy choices,” lead team member Professor Poonam Puri told yFile.
Other members of this project include Professor Andreas Veneris and Professor Fan Long of UofT, Professor Andreas Park of UTM, and Osgoode students Anxhela Adhamidhis and Cameron Teschuk.
The Bank of Canada launched the Model X Design Challenge in April of 2020, which gave universities a chance to design a business plan for Central Bank Digital Currency (CBDC). The proposal submitted by the Osgoode/UofT team was selected as one of the top three entries to be developed into a full report by the Bank.
“The Bank of Canada provided a list of goals they wanted to achieve with the project, which included recommending a model for a secure and resilient form of digital currency that would be accessible to all Canadians,” says Cameron Teschuk, a team member currently studying at Osgoode.
While the Bank emphasized that there are no current plans to actually launch the currency anytime soon, the competition’s main purpose is to set the foundation by building the currency should it be carried out in the future.
The team’s proposed currency acts as foundational grounds for a CBDC business model and system architecture. They propose a two-phase “know your customer” (KYC) approach. KYC is a verification process which verifies and links a user’s identity to their cryptocurrency wallet. This process is necessary to determine the legality of a customers activity and evaluate the risks of potential money laundering.
The team proposed creating a central bank-backed digital loonie, which they hope will mitigate risks at a global scale, promote inclusion in finance and welfare, and will safeguard Canada’s socio-economic sovereignty in our era of artificial intelligence. The team’s design emphasizes the importance of privacy through creating new monetary transmission channels for the Bank of Canada, where user’s data and anonymity is protected.
“We wanted to emphasize the importance of privacy and scalability in our design,” says Teschuk. “Our two-phased KYC approach was designed to balance these competing considerations, while also recommending a solution that provides a low-cost alternative payment method for all Canadians, in addition to the traditional commercial-bank run system.”
In phase one, the Bank of Canada introduces a centralized platform. This will establish digital cash with an authentication protocol. In the process, existing infrastructure is leveraged, and users’ privacy and data is safeguarded. In this phase, Application Programming Interface (API) will be enabled as a transaction processing commodity.
In phase two, the Bank of Canada would expand their platform in order to become the backbone (and supervisor) for a business-leveled blockchain.
When asked what the future of cryptocurrency will look like in Canada, Veneris says: “With the global frenzy following China’s introduction of DC/EP (Digital Currency Electronic Payment) and Facebook’s Diem (formerly Libra) my personal view is that it is a matter of time when we will see a Canadian Digital Loonie in the next three to four years. So in my view, it is pretty much a question of ‘when’, not ‘if’.