Overview:
The Cedar x Ubin+ initiative brought together the New York Innovation Center (NYIC) and the Monetary Authority of Singapore (MAS) for a collaborative research project. This project was aimed at exploring a cross-border multi-currency use case, employing vehicle currencies to bridge currency pairs with limited trading activity. The primary objective was to assess the potential of distributed ledger technology (DLT) in establishing connections between diverse simulated currency ledgers, thus reducing settlement risk and time.
Problem Statement:
Cross-border payments play a pivotal role in facilitating global economic activities, supporting trade, finance, and the interconnectedness of global value chains. Numerous cross-border transactions involve the exchange of different currencies, necessitating foreign exchange (FX) trades to convert and settle currencies in both the sender’s and receiver’s jurisdictions. Cross-border payments encounter challenges like high costs, slow processing, restricted accessibility, and lack of transparency compared to domestic payments.
Solution:
To address these issues, Cedar x Ubin+ explored the concept of linking separate central bank currency ledgers through hashed timelock contracts (HTLCs). These HTLCs are time-bound smart contracts functioning as bridges between disparate ledger systems, allowing for secure settlement of digital assets held on different ledgers or controlled by distinct entities. In a practical test of this model, the project focused on an end-to-end payment chain exclusively settled in wholesale central bank digital currencies (CBDCs). Commercial banks, holding accounts with multiple central banks, acted as intermediaries to facilitate seamless settlement across an illiquid currency corridor.
Key Findings:
The Cedar x Ubin+ experiment demonstrated the potential of DLT to enhance cross-border multi-currency payments and settlements. Interoperability and Autonomy: The experiment successfully interconnected separate simulated central bank currency ledgers. This setup allowed each central bank to maintain autonomy over the design and operation of its ledger, facilitating secure cross-ledger payments without relying on a central clearing entity or a shared network. Atomic Settlement: Simulated payments were settled atomically, ensuring that transactions were only completed if all components of cross-currency payment chains were successfully executed. This improvement bolstered the certainty of settlement and mitigated issues related to counterparty risks. Near Real-Time Settlement: The average end-to-end settlement time for each simulated payment scenario was under thirty seconds. This rapid settlement timeframe allowed participants to receive prompt notifications about the success of their payments.
Source:
https://www.newyorkfed.org/medialibrary/media/nyic/project-cedar-phase-two-ubin-report.pdf