New York Fed Completes Pilot For Cross-border CBDC Transactions

Central banks around the world have made massive investments into CBDC’s research. The FED, despite lagging behind other peers in the race, has sharply ramped up efforts to issue its CBDC in recent times.

The Federal Reserve Bank of New York has completed a successful pilot of the use of central bank digital currencies (CBDCs) for wholesale, cross-border transactions.

The experiment, also known as Project Cedar: Phase One, aims to explore the capabilities of blockchain technology in payment delivery and the application of CBDC in wholesale payments.

Conducted on separate blockchains to explore the capabilities of blockchain technology in delivering fast and safe payments for a lower settlement cost, the FED is now taking blockchain seriously.

New Transaction Tech for the FED

The New York Innovation Center (NYIC), the entity in charge of the project research, noted in the report that the pilot was successful.

NYIC exchanged a U.S. digital dollar with experimental foreign currencies in a simulated environment powered by blockchain technology to identify the possibility of fast and safe payments at a lower settlement cost. The phase lasted for 12 weeks.

The experiment’s result showed a significant improvement in which the average clearing and settlement of transactions reduced from 2 days to under 15 seconds.

In addition to faster transactions, the report noted that the framework could enable “atomic settlements” – an instant and simultaneous exchange of the assets.

Per von Zelowitz, director of NYIC, said:

“Project Cedar Phase I revealed promising applications of blockchain technology in modernizing critical payments infrastructure, and our inaugural experiment provides a strategic launch pad for further research and development regarding the future of money and payments from the U.S. perspective.”

Proceeding With Caution

Even though the successful outcome shed light on CBDC interoperability and integration, which could provide a standard framework for digital currency, the research center is unable to guarantee that it will be implemented in the real world.

The potential benefits of CBDCs have driven global governments into the race. The use of digital assets enables participants to overcome the difficulties associated with transactions through intermediaries.

In addition, it should improve the efficiency and safety of the payment system, facilitate real-time payments, and promote economic efficiency by avoiding fraud and money laundering, terrorist financing, and tax fraud, thereby enhancing economic integration.

However, due to the large number of variables that are involved in the design and development of CBDCs, testing and research must be carried out with extreme caution. It is not likely that CBDCs will be fully launched in this year.

Countries are exercising greater caution by holding more assessments, group discussions, and other practices. Meanwhile, their central banks are discussing whether to digitize their currencies or collaborate with private issuers.

In order to improve the efficiency and speed of payment systems and networks, most central banks choose to develop their own CBDCs. It provides real benefits when used in core central bank functions such as payments, settlements, and currency distribution.

Unknown Future for CBDCs

CBDCs also may benefit financial stability and monetary policy, while increasing payment competition and financial sovereignty. Central banks, in particular, seek ways to improve payment efficiency and security.

Because of the dollar’s advantages in international payments, the US was previously uninterested in increasing CBDCs. However, the country’s perspective has shifted, and it is now researching policies to develop the tool, technology, and potential it offers.

While the vast majority of central banks around the world are developing CBDCs, they appear to be pursuing disparate goals. The Reserve Bank of India (RBI) is the most recent central bank to establish a CBDC. However, India’s goal is to stifle the growth of cryptocurrency.

According to Rabi Sankar, Deputy Governor of the Reserve Bank of India, CBDCs have the potential to kill cryptos, threatening monetary and fiscal stability.