New York Fed & Banking Giants Begin Digital Dollar Pilot
The Federal Reserve Bank of New York announced today that it is participating in a “proof-of-concept” pilot project alongside certain U.S banking giants to explore the possibility of an “interoperable network of digital central bank liabilities and commercial bank digital money using distributed ledger technology.”
In simpler terms, the project aims to test the technical feasibility and legal viability of blockchain technology to instantaneously settle transactions between multiple regulated financial institutions located in multiple places through the transfer of central bank liabilities.
As stated by the New York Fed, current exchange mechanisms do not enable such interoperable transfer and settlement of digital assets between regulated financial institutions.
The 12-week project aims to solve this problem by building a prototype blockchain and then testing the feasibility of payments between financial institutions using “tokenized regulated liabilities” on a regulated liability network (RLN). A RLN is a blockchain-based financial market infrastructure concept that aims to facilitate digital asset transactions that connect deposits held at regulated financial institutions.
The project will consist of three “workstreams” in the areas of technology, organization and settlement. Specifically, the workstreams will:
Assess the feasibility of distributed ledger technology to achieve the project’s goals;
Illuminate technical and functional design considerations; and
Gather insight into the value of other potential use cases.
According to the New York Fed, the project will be conducted in a test environment and only use simulated data. Participants include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo. Swift is providing support for interoperability across the international financial ecosystem.
As stated by the New York Fed, the experiment is “not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a retail or wholesale CBDC, nor how one would necessarily be designed.”
After the experiment is completed, a report will be issued.
The announcement comes a few days after the New York Fed announced that it is teaming up with the Monetary Authority of Singapore as part of phase II of its Project Cedar (discussed here). This phase focuses on investigating how wholesale central bank digital currencies could improve the efficiency of cross-border wholesale payments involving multiple currencies (a distinct issue than the one discussed above).
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