NEW YORK — A central bank digital currency paired with blockchain technology could make cross-border payments faster, safer and more efficient, the Federal Reserve Bank of New York has found.
The New York Fed released the
Unlike a retail CBDC, which would be used by individual bank customers, a wholesale CBDC would be used for payment clearing and settlement between banks, governments, official institutions and nonbank financial companies.
Project Cedar is the first undertaking of the New York Innovation Center, a research group formed within the New York Fed last year in partnership with the Bank for International Settlements Innovation Hub. The center studies technological innovation within the banking and finance sectors that could benefit central banking.
There is skepticism about the usefulness of a digital dollar, including among some of the Fed's
Project Cedar joins the Federal Reserve Bank of Boston's Project Hamilton, a partnership with the Massachusetts Institute of Technology focused on CBDCs more broadly. The Boston Fed's initiative rolled out its first findings in February.
Since then, the argument in favor of a central bank digital currency has gained traction, through supportive
In rolling out its findings, the New York Fed noted that it was merely adding to the dialogue about CBDCs and it has taken no stance on whether one should be adopted in the U.S. Still, while the report noted there were more questions to be answered, its findings were largely positive.
For Project Cedar's initial 12-week phase, the New York Fed designed a prototype CBDC and connected it to a blockchain distributed ledger network. It then simulated foreign exchange spot transactions with counterparts using separate but similar ledgers. It found that transactions cleared atomically — meaning for both parties simultaneously — within 10 seconds, on average.
Typically, such spot transactions take two days to settle. During that time, both participants face the risk of the other side defaulting or the transfer not settling for some other reason. The wholesale CBDC and blockchain structure tested significantly reduced or eliminated many of these risks, the New York Fed report noted.
"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 in a statement. "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."
Project Cedar research also indicated that throughput of the prototype system increased as more currencies were added, potentially setting up for further efficiencies should more capabilities, such as compliance checks and market making, be incorporated.
The foreign exchange market is the large wholesale market in the world, accounting for a daily turnover of $7 trillion. This makes it a logical starting point for wholesale CBDC research, according to the report.
Another benefit of the CBDC-based blockchain system, the New York Fed found, is that it would allow for payments to be settled 24 hours a day, seven days a week and 365 days a year, unlike the current system which is only available during business hours.
Future phases of Project Cedar research will focus on ledger design, interoperability, security and other areas, the report noted.
