New York Fed Reports Outcome of Phase I of wCBDC Framework Trial
The Federal Reserve Bank of New York (New York Fed) released ‘positive’ results from the initial phase of its initiative to establish a technological architecture for a hypothetical wholesale central bank digital currency (wCBDC). The first stage of the Project Cedar experiment investigated the possible use of distributed ledger technology, primarily blockchain, to improve the operation of cross-border remittances.
The 3-month trial also involved the construction of a wholesale CBDC model and proved that wholesale cross-border digital money trades powered by blockchain technology are capable of facilitating quick and secure remittances.
“Secure and effective cross-border remittances are essential for the world’s economy to operate,” stated Per von Zelowitz, head of the New York Innovation Center (a strategic collaboration between the Federal Reserve Bank of New York and the Bank for International Settlements) (BIS).
“Cedar Phase I highlighted interesting uses of blockchain technology in modernizing vital payments framework, and our first trial offers a vital springboard for additional study on the future of money and remittances from a U.S. viewpoint.”
In Phase I of Project Cedar, a study replicated a foreign exchange (FX) spot transaction and presented a wholesale central bank digital currency prototype in an effort to explore if blockchain technology may enhance the quickness, cost, and accessibility of cross-border wholesale remittances.
Usually, FX spot transactions take roughly two days to complete. This exposes counterparties to settlements and counterparty risk, which may hinder an institution’s efforts to obtain liquidity.
The experiment yielded three important results:
Quicker payments: In the trial setting, blockchain-powered distributed ledger transactions cleared in less than 15 seconds on average.
Atomic settlement: The simulated distributed ledger network supported atomic settlement, implying that all ends of the simulated trades were finalized instantaneously or didn’t occur at all.
Safer and accessible transactions: The structure of the distributed ledger system facilitated payments 24 hours a day, seven days a week, 365 days a year, and backed interoperability goals by enabling trades across networks of relatively homogenous ledgers covering multiple financial institutions such as central and private sector banks.
Technically speaking, the Phase I study intends to pave way for a wide and open public discourse concerning CBDC. As per the New York Fed, the report identified areas in need of more study, including ledger platform architecture, interoperability, and safety.
As portion of its ongoing wCBDC research, the NYIC will investigate interoperability and ledger design issues, such as how to establish concurrence and optimally guarantee atomic transactions throughout various blockchain-powered payment systems.