A central bank digital currency would enable faster payments, according to research recently released by The Federal Reserve Bank of New York.
The Fed’s report, issued Nov. 4, covered the first phase of the bank’s development of a technical framework for a theoretical CBDC. The 12-week experiment, dubbed Project Cedar, included simulating a foreign exchange spot trade and introducing a wholesale CBDC prototype to assess whether it could improve the access and speed and reduce costs in accessing cross-border wholesale payments.
According to the Fed, the distributed ledger system allowed for payments on a 24/7/365 basis and allowed for distributed ledger system settlement to take place on average in under 15 seconds. The simulated ledger network allowed for both sides of the simulated transactions to be settled either instantly or not at all. “This greatly reduces the various forementioned risks that counterparties incur in the current state environment,” the Fed stated.
In September, the Biden administration expressed support for creating a CBDC while saying more research is needed on the plan. Though not mandating the creation of a CBDC, Biden directed the U.S. Treasury to lead an interagency working group to analyze the possibility of the digital dollar in a cryptocurrency regulatory framework issued Sept. 16.
Proponents of a CBDC say it could help the U.S. preserve its role as a global financial leader and serve as an effective enforcer of sanctions, enable a more efficient and inclusive payment system, foster tech innovation, and facilitate faster cross-border transactions.
The Fed has already announced that it will not issue a CBDC “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” Pushback to a CBDC remains strong from both banking groups and key Republicans. Sen. Mike Lee (R-Nev.) has introduced a bill that would prevent the Fed from issuing a CBDC, which he said “would alter the ability of financial institutions to function as lenders, while giving the federal government knowledge of every purchase that uses a CBDC.”
The Independent Community Bankers Association of America and American Bankers Association have both called on Congress not to authorize the creation of a CBDC due to the perceived risks to existing payments and banking systems.
The New York Fed plans to continue studying the interoperability and ledger design of a theoretical CBDC, but has not released a firm timeline of when that will take place.
“Safe 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. “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.”