Federal Reserve researchers are optimistic that a central bank digital currency could significantly reduce the time and cost of cross-border currency trading, according to research released Friday.
The Federal Reserve Bank of New York’s Innovation Center published the results of the initial phase of Project Cedar, the bank’s effort to create a technical framework for a central bank digital currency that could be used by major financial institutions to verify and settle currency transactions.
“Secure and efficient cross-border payments are critical to the functioning of the global economy,” said Per von Zelowitz, director of the New York Innovation Center, in a statement
The study “revealed promising applications of blockchain technology to modernize critical payment infrastructure, and our first experiment provides a strategic launch pad for further research and development regarding the future of money and payments from the US perspective,” he added.
The foreign exchange market sees more than $7 trillion in daily turnover, according to the Bank of International Settlements, and these transactions are critical components of trade between nations. Currently, foreign exchange transactions take about two days to settle, exposing parties to credit risk and making the global economy less efficient.
The New York Fed’s experiment sought to answer whether a new type of digital currency, issued by a central bank for use by the major financial institutions, typically on either side of a currency trade, could bring more efficiency to the market.
Researchers found that such a “wholesale” central bank digital currency could enable “instant” settlement, where each party simultaneously receives the proceeds of a transaction, versus today’s patching system that varies based on which institution is on each side of a transaction.
The New York Fed’s research aligns with experiments conducted by the Bank of International Settlements on the potential benefits of central banks’ digital currency, and also reflects efforts by the Securities and Exchange Commission to find ways to shorten stock trade settlement times from the current two days. to a.
However, technological obstacles are not the only obstacle to shortening the settlement time for cross-border transactions. Competing government policies aimed at combating money laundering and other criminal activity also slow down transactions.
Meanwhile, private creators of digital currency, such as USD Coins USDCUSD,
Circle also hopes to solve problems related to slow speed and increased risk of cross-border payments.
In January, the Federal Reserve Board issued a report examining the benefits and risks of a digital central bank currency that focused on a digital retail dollar that could be used by ordinary Americans, versus the wholesale model envisioned in the report released Friday. .
The Federal Reserve Bank of Boston released research in February on a retail-focused digital dollar, showing that a codebase it was experimenting with was capable of handling 1.7 million transactions per second, much higher than public blockchains like bitcoin BTCUSD,
That said, issuing a digital dollar could carry risks, including the potential to weaken the U.S. banking system by giving Americans an alternative way to save money, and many Fed officials are skeptical of its usefulness.
“While [central bank digital currencies] continues to generate tremendous interest in the United States and other countries, I remain skeptical that a central bank at the Federal Reserve will solve any major problem facing the American payments system, Fed Governor Christopher Waller said in a speech on the subject last year.
