By Solarina Ho
TORONTO, Feb 10 (Reuters) - The Bank of Canada's early experiment on a blockchain-based payment system highlights challenges such as cost-efficiency and data privacy, according to an article by a senior bank official published on Friday.
"The experiment will be ongoing until later this spring, but already it has taught us a lot about how the technology would have to improve to win a horse race with our current Large Value Transfer System (LVTS)," senior deputy governor Carolyn Wilkins wrote in an article published on Coindesk.com.
LVTS is the Canadian system for electronic wire transfers of large sums of money.
Known as "Project Jasper," the blockchain experiment launched last year is a joint initiative between Canada's central bank, Payments Canada and R3, a consortium of the world's largest financial institutions, including Canada's biggest banks.
Originally used to underpin digital currencies like bitcoin, blockchain is a distributed record of data or transactions, maintained by a network of computers without the need for approval from a central authority.
Banks and other large financial institutions have been ramping up efforts to develop blockchain-based technology to run some of their most burdensome back-office processes, such as the clearing and settlement of securities.
Wilkins said the experiment shows cost-savings are unlikely to come directly from the core system itself, but rather through reducing the need for data reconciliation.
While the shared, or "decentralized," nature of distributed ledger technology may cut security risks, core payment systems used by financial institutions still require "a substantial amount of centralization," she wrote.
A Bank of Canada spokesman said in an email that public blockchains share too much information and do not meet the requirements for the bank's core payment systems.
Private blockchains, which are favored by banks over public ones, have a central authority, or designated administrators who manage the network under agreed terms.
Wilkins said the group was looking at a new prototype of the platform to try to address further aspects of a blockchain-based payment system, such as how to verify transactions by members of the system and balancing that with how much information participants are comfortable with sharing.
The Bank of Canada declined to elaborate on other issues mentioned in article, such as cybersecurity, legal issues and data privacy.
(Reporting by Solarina Ho; Editing by Leslie Adler)