Bank of Canada Launches Digital Dollar Pilot with OpenCBDC 2PC

The Bank of Canada has initiated a pioneering pilot program to explore the potential of a digital dollar built on the OpenCBDC 2PC platform. This initiative is part of a broader effort to investigate how central bank digital currencies (CBDCs) can achieve a balance between user privacy, regulatory compliance, and peer-to-peer (P2P) transaction capabilities, all while ensuring protection against financial crimes.

The core challenge for central banks globally is to maintain user privacy while adhering to compliance standards. The Bank of Canada’s pilot leverages OpenCBDC’s two-party computation (2PC) model to address this issue. In this model, sensitive data remains encrypted and is distributed across network nodes, preventing any single entity from accessing complete transaction details. This setup allows law enforcement agencies to trace illicit activities under controlled conditions, thereby meeting anti-money laundering (AML) and counter-terrorism financing (CTF) requirements without exposing every transaction to surveillance.

Unlike traditional CBDC models that rely on centralized intermediaries, OpenCBDC 2PC promotes decentralized, peer-to-peer digital cash. This allows users to transact directly without intermediaries, reducing friction and maintaining transaction resilience even if a central server fails. This model aligns with global efforts to modernize payments infrastructure using blockchain-inspired technology, while keeping central banks in a mediating role.

The pilot program’s current phase focuses on technical demonstrations, including simulated transactions between participants. The Bank of Canada will evaluate the system’s performance, public reaction, and potential risks before considering a broader rollout or a live pilot. The integration of compliance checks ensures the system can operate within existing legal frameworks, while the privacy protections built into OpenCBDC could earn public trust, which is critical for adoption.

The Bank of Canada has also released a research report in collaboration with the Massachusetts Institute of Technology (MIT) Digital Currency Initiative, outlining a system called “OpenCBDC 2PC” that underpins the proposed framework. This initiative addresses concerns about government surveillance of financial activities by prioritizing individual privacy, allowing users to directly hold and manage their digital funds without relying solely on intermediaries.

The proposed OpenCBDC 2PC model features a dual-layer architecture that separates the roles of the central bank and intermediaries. Users can choose to store digital currency in personal wallets or entrust financial institutions for custody. The system outlines three types of wallets: personal wallets, institutional wallets, and wallets designed for contactless payments. The payment process involves updating the central ledger and facilitating wallet-to-wallet fund transfers between users. Unlike traditional bank-account-based systems, the proposal adopts an “Unspent Transaction Output (UTXO)” design, similar to Bitcoin. This model treats funds as discrete transaction units transferable directly between wallets, offering real-time settlement capabilities and enhanced privacy protections.

To further enhance privacy, the report explores the implementation of cryptographic techniques such as Zero-Knowledge Proofs (ZKP). This innovation ensures that even transaction amounts remain undisclosed to the system, safeguarding users’ sensitive information. Such measures position the proposed CBDC as offering significantly higher levels of privacy than existing electronic payment systems.

The Bank of Canada clarified that the research and design outlined in this report do not constitute a formal move toward CBDC issuance. Instead, the study aims to establish a technical foundation to balance privacy, system oversight, and technological stability. The report also highlighted infrastructure challenges, such as the need for retail payment infrastructure, including point-of-sale (POS) terminals, to support widespread adoption of digital cash transactions.

Adding potential momentum to CBDC developments is Mark Carney, who recently assumed office as Canada’s prime minister. Carney has consistently supported the idea of central bank-issued digital currencies, expressing optimism regarding the need for a CBDC in various public forums. In his 2021 book, he remarked that, “The future of money is likely to be dominated by central bank-issued stablecoins, namely CBDCs.” The leadership’s favorable stance, combined with the Bank of Canada’s technical research efforts, has fueled speculation that Canada is inching closer to implementing a digital currency. Whether the proposal will evolve into a tangible policy remains closely monitored by financial experts and market participants alike.