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JOHN SOPINSKI/The Globe and Mail

The Bank of Canada is experimenting with a digital currency and payment system as it grapples with the risks and opportunities posed by unregulated digital currencies such as bitcoin.

Senior deputy Governor Carolyn Wilkins is slated to disclose more details Friday of ongoing research it is doing with Canada's Big Five banks and other industry players into a proposed interbank payment system based on its own digital currency – the CAD-Coin – rather than hard cash.

The bank is working on the project with the big banks, Payments Canada and R3, a New York-based consortium backed by roughly 50 of the world's largest banks.

The Bank of Canada described the project as a "wholesale interbank payment system using a distributed ledger" – a decentralized network that employs the same technology as bitcoin and promises to make the financial system safer and more efficient.

The experiment, dubbed Project Jasper, involves banks pledging cash collateral into a special pool, which the central bank would convert to a digital currency.

Like other central banks, the Bank of Canada has fretted about the threat posed by bitcoin and other digital currencies it doesn't control. The emerging world of virtual cash is a challenge to the authority of governments and central banks.

Yet major central banks are now exploring the potential of blockchain – where networked computers record and settle transactions using the same technology as bitcoin – in the belief that the technology could make the global financial system more transparent, allow central bankers to monitor regulatory compliance in real time and potentially lower the risks of a financial crisis.

Earlier this month, the U.S. Federal Reserve, the World Bank and the International Monetary Fund organized a three-day conference that addressed the prospects of blockchain, where Fed chair Janet Yellen urged central bankers to learn everything they can about the new technology.

Ms. Wilkins, who is due to speak about the project at a Payments Canada event in Calgary on Friday, characterized the venture as "conceptual" in nature and said it's one of "many fintech research projects" it is conducting.

"The Bank's goal in these projects is solely to better understand the technology first-hand," Ms. Wilkins explained in a statement Thursday. "Other frameworks need to be investigated, and there are many hurdles that need to be cleared before such a system would ever be ready for prime time."

None of the bank's experiments involve "central-bank issued e-money‎ for use by the general public," she insisted. Instead, the digital currency would be used by banks and other financial institutions involved in the complex payment network that underpins the financial system.

This is not the first time that the Bank of Canada has addressed this issue.

"E-money and the technology that enables it are circumventing our models of payment and fast creating new efficiencies and new risks," Ms.Wilkins warned in a November, 2014, speech. "It affects the risks faced by people who use e-money and it has the potential to affect risks to the Canadian financial system as a whole."

The bank and the federal government have another, more selfish, reason for not wanting virtual currencies to muscle in on the dominance of the Canadian dollar – huge profits. The Bank of Canada remits a surplus of roughly $1-billion a year to Ottawa on the proceeds of printing money – so-called seigniorage. Those operations also pay for running the central bank.

Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce are all involved in the project. A Bank of Canada official said the National Bank of Canada could also join through its involvement in the R3 consortium.

Individual banks had no comments to make, deferring to the Bank of Canada. However, they have been exploring the use of blockchain in their own businesses, with RBC suggesting recently that the technology could be used for loyalty programs.

The Bank of England has also been actively exploring the potential of blockchain. In March, Ben Broadbent, deputy governor of monetary policy at the central bank, expounded upon the virtues of the technology in improving the financial system and creating a so-called central bank digital currency. "There's no denying the technology is novel," Mr. Broadbent said in a speech. "Prospectively, it offers an entirely new way of exchanging and holding assets, including money."

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