The Federal Reserve Bank of New York (New York Fed) has shared ‘promising’ findings from the first stage of its project to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC).
Phase I of the Project Cedar experiment examined the potential application of distributed ledger technology, specifically blockchain, to enhance the functioning of cross-border payments.
The 12-week experiment also included the development of a wholesale CBDC prototype and revealed that wholesale cross-border digital currency transactions supported by blockchain technology can deliver fast and safe payments.
“Safe and efficient cross-border payments are critical to the functioning of the global economy,” said Per von Zelowitz, director of the New York Innovation Center (a strategic partnership between the Federal Reserve Bank of New York and the Bank for International Settlements (BIS). “Project
“Cedar Phase I revealed promising applications of blockchain technology in modernising critical payments infrastructure, and our inaugural experiment provides a strategic launch pad for further research and development regarding the future of money and payments from the US perspective.”
Phase 1
In Project Cedar Phase I, the experiment simulated a foreign exchange (FX) spot trade and introduced a wholesale central bank digital currency prototype to test whether using blockchain technology could improve speed, cost, and access to cross-border wholesale payments.
It typically takes around two days for a FX spot transaction to settle. This leaves counterparties exposed to settlement, counterparty and credit risk which could impact an institution’s ability to access liquidity.
The experiment revealed three key findings:
- Faster payments: In the test environment, transactions on the blockchain enabled distributed ledger system settled under 15 seconds on average.
- Atomic settlement: The simulated ledger network enabled atomic settlement, meaning both sides of the simulated transactions were settled either simultaneously or not at all.
- Safer and accessible transactions: The distributed ledger system design enabled payments on a 24/7/365 basis and supported objectives related to interoperability by enabling transactions across homogeneous ledgers networks representing a variety of financial institutions, including central and private sector banks.
The Phase I report aims to contribute to a broad and transparent public dialogue about CBDC from a technical perspective. According to New York Fed, it highlighted areas for further research, specifically around ledger platform design, interoperability, and security.
As part of its continued wCBDC research, the NYIC will also explore questions related to interoperability and ledger design, including how to achieve concurrence and best enforce atomic transactions across different blockchain based payment systems.
