The New York Federal Reserve Bank has published a report detailing its findings from Project Cedar, an inaugural project geared at developing a technical framework through which a wholesale central bank digital currency (wCBDC) could be created for use by the Federal Reserve Bank.
During phase 1 of the project, the New York Fed wanted to demonstrate whether or not blockchain technology had the potential to improve access, increase speed and lower the costs associated with wholesale cross-border foreign exchange transactions. These transactions are very common because they are relied on by private banks, central banks and large corporations as well as other institutions that are domiciled in different jurisdictions in the execution of various transactions, including but not limited to international trade.
While transnational payment transactions currently work well, the New York Fed believes that there are opportunities for improvement, and the prototype designed in phase 1 of Project Cedar was aimed at looking for some avenues through which improvements could be effected in this space.
For example, it currently takes approximately two business days for a foreign exchange spot transaction to clear. In that time, the parties involved are exposed to a variety of risks, such as counterparty risks, settlement risks and credit risks. All these make it harder for the affected institution to access the liquidity it needs to keep functioning. Reducing the settlement time would therefore ease access to the needed liquidity and eliminate or at least reduce the risks of delaying to conclude a cross-border spot transaction.
During the test project, different simulated CBDCs were maintained on different blockchain ledgers as would be the case in the real world where no two central banks can run their monetary system using the same platform or protocol. The test project used Rust as the preferred programming language for the distributed ledgers.
The trial showed that FX spot transactions could be completed in a maximum of 15 seconds, both sides of a cross-border transaction were settled atomically (both sides approved or rejected a given transaction at the same time), and transactions were safer as well as more accessible since the system could operate 24/7 throughout the year.
The success of this phase of Project Cedar paves the way for the next phase, and the Federal Reserve Bank of New York says this next phase will look more closely at matters of interoperability, security and system design. Singapore’s Monetary Authority will be involved in this upcoming phase of the project.
This degree of involvement in blockchain tech by the NY Fed sends the right signals to the market, and other players such as Bit Digital Inc. (NASDAQ: BTBT) in the blockchain space will take encouragement from such high-level institutional interest in the space.
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