Project Cedar: Enhancing cross-border payments with blockchain technology

Project Cedar is the first project of the New York Innovation Center. It is a multi-phase research effort to develop a technical framework for a theoretical wholesale digital currency for central banks (wCBDC) in the context of the Federal Reserve.

In Phase I of Project Cedar, a wholesale central bank digital currency prototype was developed to demonstrate the potential of blockchain to improve the speed, cost and access of a critical element of the wholesale cross-border payments market – a foreign exchange (FX) spot transaction .

Problem location

Wholesale cross-border payments are financial transactions between central banks, private sector banks, companies and other institutions based in separate jurisdictions. Currency spot trades are among the most common cross-border wholesale payments, as they are often required to support broader transactions, such as for international trade or foreign asset investment.

While cross-border payments work well, there is room for improvement. Generally, it takes around two days for an FX spot transaction to settle. During these two days, counterparties are exposed to settlement, counterparty and credit risk which can, among other things, hinder an institution’s ability to access liquidity.

Solution concept

In a simulated wholesale FX spot transaction, Project Cedar developed a wholesale digital currency prototype for central banks to test whether blockchain technology can deliver fast and secure payments. At the core of Project Cedar’s solution concept was the distributed ledger infrastructure – a multi-ledger construct where each currency was maintained on a separate ledger, operated by its respective simulated central bank.

The Phase I prototype included design choices such as a permissioned blockchain network, using an Unspent Transaction Output (UTXO) data model, and Rust as the primary programming language.

Results

Project Cedar showed that blockchain-enabled cross-border payments can be faster, simultaneous and safer:

• Faster payments: In the test environment, transactions on the blockchain-enabled distributed ledger system were settled in under 15 seconds on average.
• Nuclear settlement: The simulated ledger network enabled atomic settlement, meaning that both sides of the simulated transactions were settled either simultaneously or not at all, reducing the risk currently borne by counterparties.
• Safer and accessible transactions: The distributed ledger system design enabled payments on a 24/7/365 basis and supported interoperability goals by enabling transactions across separate, homogeneous ledger networks representing a variety of financial institutions, including central and private sector banks.

Next step

Phase I of Project Cedar revealed key questions and highlighted areas for further research, particularly around ledger platform design, interoperability and security. As part of its continued wCBDC research, NYIC will explore issues related to interoperability and ledger design, including how to achieve concurrency and best enforce atomic transactions across different blockchain-based payment systems.

Download the phase I report