Canada’s central bank has completed a collaborative pilot to evaluate how tokenization and distributed ledger technology (DLT) can improve bond issuance and settlement in a real-world setting, which involved the issuance of a single CAD$100 million (US$73.9 million) bond.
The Bank of Canada (BoC) announced on March 5 the completion of ‘Project Samara,’ the key milestone of which was the issuance last week of Canada’s first tokenized bond using DLT, with payments settled in wholesale central bank deposits.
The bond was issued to a closed investor group, sold and traded, and will be managed throughout its life cycle on the Samara Platform, which is a BoC collaboration with investment bank RBC, multinational banking and finance company TD Bank Group (TD), and Export Development Canada (EDC), Canada’s export credit agency.
The experiment was designed to test support for end-to-end transactions throughout the bond’s life cycle—including cash and bond issuance, bidding, coupon payment, redemption, and secondary trading—on DLT infrastructure.
The project was built on the Hyperledger Fabric blockchain platform, which allows integration of separate bond and cash ledgers, enables instant settlement of transactions, supports secondary market trading, and allows tokenized bond settlement directly on the chain.
“Project Samara shows how the public sector and industry can work together to harness innovation in the payment ecosystem,” said Ron Morrow, Executive Director of Payments, Supervision and Oversight at the BoC. “The Project allowed us to understand the real-world benefits and challenges of tokenization in capital markets.”
Meanwhile, Scott Moore, Executive Vice-President, Finance and Chief Operating Officer at EDC, said the success of Project Samara “marks an important step in deepening our understanding of tokenization and distributed ledger technology and how it can contribute to the efficiency and security of financial instruments to better serve investors, businesses and the financial community.”
The scheme builds on earlier experimental work from the BoC’s ‘Project Jasper’ series, a first-of-its-kind collaborative research initiative between the public and private sectors that was launched in 2017 to understand how DLT could transform the wholesale payments system.
Samara’s innovation was testing the real-world feasibility and implications of a DLT-based platform for capital markets, using a real bond funded and traded with central bank money.
Swings and roundabouts of DLT
According to the BoC, the experiment revealed both the potential and the limitations of DLT in a real-world financial setting.
For example, on the one hand, operational efficiency and data integrity were improved, and workflows were streamlined, but “efficiency gains were partially offset by system complexity, liquidity costs, the need for new governance structures, and increased attention in coordination, reporting and oversight.”
The Bank also highlighted that while potential counterparty and settlement risk were reduced, new operational risks related to technology, auditability, and fallback mechanisms were introduced.
The project reportedly also revealed gaps between the current regulatory framework and “DLT principles.”
However, overall, the BoC hailed Project Samara as a positive that “generated valuable insights into the practical application of DLT in capital markets,” adding that “while impacts in the short term are uncertain, the technology appears well-positioned to deliver efficiency and resilience benefits over the long term.”
Canada progressing digital asset rules
Alongside its recent experiments with DLT in the banking and finance space, Canada has been moving to shore up its digital asset rules.
In February, Canada’s investment regulator, the Canadian Investment Regulatory Organization (CIRO), published a new interim framework governing digital asset custody that sought to address the “technological, operational, and legal risks unique to digital assets.”
The framework reportedly focuses on dealer/broker relationships with custodians of digital assets, with CIRO distinguishing between custodians of “crypto assets” (such as BTC) and those of “tokenized assets“—both are affected by the interim framework, but tokenized asset custodians must also comply with the custody framework for traditional assets.
Custodians were hence distinguished into four “tiers” based on the standards they met, including controls for regulatory oversight, technology assurance, operational resilience, and capital; those in a higher tier generally face more relaxed obligations than those in lower tiers.
Each tier custodian is permitted to hold different percentages of a broker/dealer’s assets. For example, tier 1 custodians are permitted to hold up to 100% of a dealer’s assets, while tier 4 custodians may only hold 40%.
The framework came into effect immediately, but CIRO said it would “consider appropriate transition arrangements… on a case-by-case basis,” and that the framework is intended as an interim one.
“Over time, elements of this framework may inform the development of permanent rules or harmonized regulatory instruments as crypto asset markets mature,” said the regulator.
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Source: https://coingeek.com/bank-of-canada-completes-dlt-bond-issuance-experiment/