The Federal Reserve Bank of New York released a report that includes the first phase of results from a multiphase research effort to develop a technical framework for a wholesale central bank digital currency (CBDC).
The initiative is known as Project Cedar, and it is the inaugural project of the New York Fedʻs New York Innovation Center (NYIC).
Phase I examined the potential application of distributed ledger technology, specifically blockchain, to improve cross-border payments. The 12-week experiment 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,” Per von Zelowitz, director of the New York Innovation Center, said. “Project Cedar Phase I revealed promising applications of blockchain technology in modernizing 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 U.S. perspective.”
Specifically, Phase I simulated a foreign exchange (FX) spot trade and introduced a wholesale CBDC prototype to test whether using blockchain technology could improve speed, cost, and access to cross-border wholesale payments. Currently, it takes about two days for most FX spot trades to settle. During this period, payment senders and recipients are exposed to settlement, counterparty, and credit risk, which, among other things, can hinder an institution’s ability to readily convert its assets into cash.
The Phase 1 experiment revealed three key findings that showed how cross-border payments supported by blockchain technology can deliver faster and safer payments. The first finding showed that transactions on the blockchain-enabled distributed ledger system settled in under 15 seconds on average. Second, the simulated ledger network enabled atomic settlement, meaning both sides of the simulated transactions were settled either simultaneously or not at all. This greatly reduces the risks that counterparties are currently subject to. Third, the distributed ledger system enabled payments on a 24/7/365 basis and transactions across homogeneous ledgers networks.
Further, the project revealed key questions and highlighted areas for further research, specifically around ledger platform design, interoperability, and security.
New York Fed officials point out that the project is not intended to advance any specific policy outcome or signal that the Federal Reserve will make any imminent decisions about issuing a retail or wholesale CBDC.