Project 1: Retail CBDC — Digital Dollar
Federal Reserve policymakers and staff have been studying CBDC closely for several years. In January 2022, they published a white paper that discusses existing forms of money; the current state of the U.S. payment system and its relative strengths and challenges; and the various digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. The paper focuses on CBDC uses and functions; potential benefits and risks; and related policy considerations. The Federal Reserve’s initial analysis suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.
The paper examined the pros and cons of a potential U.S. central bank digital currency, or CBDC, and is the first step in a discussion of whether and how a CBDC could improve the safe and efficient domestic payments system.
Source:
https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
Project 2: Digital Dollar Project — Independent Research by Non-Government organisation
The Digital Dollar Project (DDP) is a non-profit, non-governmental organization devoted to catalyzing research, exploration, and real-world experimentation of a potential digital dollar. The DDP believes that the dynamism and innovation of the private sector has a crucial role to play in the consideration of a digital dollar. Transparent private sector research and experimentation conducted in a neutral space is beneficial to policymakers, academics, technologists, economists, and the broader national interest. The decision of whether to digitize the dollar is no different than past U.S.-led technological innovations — including the space race and the creation of the Internet — in which both the public and private sectors contributed significantly. To ensure that its work is guided by a diversity of experiences, perspectives, and expertise, the DDP assembled an Advisory Group that includes economists, business leaders, technologists, innovators, lawyers, academics, consumer advocacy and human rights experts, and ethicists. The Advisory Group aims to help explore design options and approaches for evaluating a digital dollar and contributes to stakeholder meetings, roundtable discussions, open forums, and white papers.
The DDP published several white papers in the past. They can be read here.
Project 3: Cross-border Projects — Project Cedar
Project Cedar is a joint wholesale cross-border CBDC project with the Federal Reserve Bank of New York and Monetary Authority of Singapore (MAS). It involves a multi-stage technical research endeavor aimed at assessing the possible uses of financial technology solutions to enhance the effectiveness of wholesale cross-border payments.
PROJECT CEDAR PHASE I
During the initial phase of Project Cedar, a prototype for a wholesale central bank digital currency (CBDC) ledger was developed to showcase the potential of blockchain technology in enhancing the speed, cost-effectiveness, and accessibility of a crucial aspect of the wholesale cross-border payments market: foreign exchange (FX) spot transactions.
Problem Statement:
Wholesale cross-border payments encompass financial dealings involving central banks, private banks, corporations, and other entities located in different jurisdictions. Among these transactions, FX spot trades are particularly prevalent, as they often underpin more extensive activities like international trade or investments in foreign assets. Despite the functioning of cross-border payments, room for improvement exists. Generally, settling an FX spot transaction takes approximately two days, during which counterparties are exposed to settlement, counterparty, and credit risks. These risks can impede institutions’ ability to access liquidity, among other issues.
Solution:
In the first phase of Project Cedar, a prototype of a wholesale CBDC ledger was developed to simulate a wholesale FX spot transaction. The goal was to assess whether blockchain technology could offer swifter and more secure payment processing. A core element of this prototype involved a distributed ledger infrastructure, employing a multi-ledger framework wherein each currency was housed on a distinct ledger administered by its respective simulated central bank. The prototype incorporated design decisions such as utilizing a permissioned blockchain network, adopting an Unspent Transaction Output (UTXO) data model, and employing the Rust programming language.
Key Findings:
Project Cedar demonstrated that blockchain had the potential to facilitate quicker, simultaneous, and safer cross-border payments. Enhanced Speed: In the testing environment, transactions conducted on the blockchain-powered distributed ledger system settled in under 15 seconds on average. Atomic Settlement: The simulated ledger network enabled atomic settlement, ensuring that both sides of simulated transactions were either settled concurrently or not at all. This approach reduced the risks typically borne by counterparties. Secure and Accessible Transactions: The design of the distributed ledger system supported round-the-clock payment availability and met objectives concerning interoperability by enabling atomic settlement of transactions across separate but homogeneous ledger networks representing diverse financial institutions, including both central and private sector banks.
PROJECT CEDAR PHASE II X UBIN+ (CEDAR X UBIN+)
The Cedar x Ubin+ initiative brought together the New York Innovation Center (NYIC) and the Monetary Authority of Singapore 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.
Sources:
https://www.newyorkfed.org/medialibrary/media/nyic/project-cedar-phase-one-report.pdf