A monthslong test with some of the world’s largest banks found that digital dollars could be an effective way to improve domestic and cross-border payments, according to a unit of the Federal Reserve Bank of New York.
The Fed’s New York Innovation Center spent 12 weeks testing a technology known as a regulated liability network, which allows banks to simulate issuing digital money representing their customers’ own funds before settling through central bank reserves on a distributed ledger. The test proved to the Fed that these so-called digital dollars have the ability to improve wholesale payments and that the use of the ledger didn’t alter the legal treatment of the deposits.
“From a central banking perspective, the proof of concept was conducive to exploring tokenized regulated deposits and understanding the potential functional benefits of the central bank and commercial bank digital money operating together on a shared ledger,” Per von Zelowitz, director of the New York Innovation Center, said in a statement.
Some of the world’s biggest banks, including Citigroup Inc. and Wells Fargo & Co., joined in the Fed’s test to see whether the new system could solve problems including the movement of cash across borders. The New York Innovation Center said the project doesn’t reflect the views of the Federal Reserve Board, Federal Reserve Bank of New York, or any other component of the Federal Reserve system.
The test was done on a private blockchain that requires permission to participate, rather than public blockchains commonly seen in the world of cryptocurrencies.
The project concluded that it didn’t identify “any insuperable legal impediments” under existing US laws that would prevent the establishment of such a digital dollar. Still, further “engagement with regulators” would be required before reaching a final conclusion, according to the statement.
A central bank digital currency is far from a reality in the US, and some officials at the Federal Reserve have expressed doubt over the need for one. Meanwhile, some banks, such as JPMorgan Chase & Co., have said they see promise in deposit tokens — issued by banks on blockchain — which could be more widely used than stablecoins.
“The proof-of-concept is not intended to advance any specific policy outcomes, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a central bank digital currency, or any other product or service, nor indicate how one would necessarily be designed,” the New York Innovation Center said.
Currently, when banks send money overseas, it’s often a lengthy and cumbersome process because of the many different systems used by banks and governments around the world. Participants in the pilot found that the technology could help synchronize dollar-denominated payments and facilitate settlement in near-real time.
“We have been greatly encouraged by the business, legal and technical findings,” Tony McLaughlin, who leads emerging payments and business development at Citigroup’s treasury and trade solutions unit, said in a statement. “In particular, the prospect of a global, instant US dollar payment system that could benefit cross-border settlements merits further serious study.”
A message from Advisor Perspectives and VettaFi: To learn more on this and other topics, check out our full schedule of upcoming CE-approved virtual events.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Jenny Surane, Yueqi Yang
