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New York Fed publishes results of proof-of-concept for wCBDC with major U.S. banks

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(Kitco News) - The Federal Reserve Bank of New York's New York Innovation Center (NYIC) published the findings of a 12-week proof of concept (PoC) that explored the feasibility of a regulated liability network (RLN), a theoretical payment infrastructure designed to support the exchange and settlement of regulated digital assets, including a digital dollar.

“The RLN concept explores the application of shared ledger technology to regulated money to deliver programmable, near real-time transactions with finality of settlement on a 24/7 basis,” the report said. “It maintains the current two-tier financial system of central and commercial bank money, incorporating wholesale central bank digital currency (wCBDC) and commercial bank deposit tokens, all within a shared ledger operated by a new financial market infrastructure (FMI).”

The PoC was conducted with several commercial banks, global payment and messaging networks including BNY Mellon, Citi, HSBC, Mastercard, the NYIC, PNC, Swift, Truist, TD Bank, U.S. Bank, and Wells Fargo, together with the NYIC. The working group was supported by the law firm Sullivan & Cromwell, technology providers Digital Asset and SETL powered by Amazon Web Services (AWS), and Deloitte, which provided advisory services.

"From a central banking perspective, the proof of concept was conducive to exploring tokenized regulated deposits and understanding the potential functional benefits of central bank and commercial bank digital money operating together on a shared ledger," said Per von Zelowitz, Director of the New York Innovation Center in the announcement.

The study included three workstreams that analyzed the technical feasibility, business applicability, and legal viability of using shared ledger technology to settle private bank liabilities through the transfer of CBDC. The experiment was conducted in a test environment and used only simulated data.

“The experiment successfully simulated both domestic and cross-border scenarios, identifying shared ledger technology as a potential solution to support payment innovation,” the NYIC said.

The technical workstream “validated that the proposed architecture was able to deliver the benefits of settlement finality, a common source of truth, standard transaction data, and privacy for all participants on the network,” they said. “Including a theoretical wCBDC and commercial bank deposit tokens on the same platform enabled a shared ledger to settle payment transactions simultaneously and in near real-time.”

The business workstream “concluded that the network has the potential to deliver improvements in the processing of wholesale payments due to its ability to synchronize U.S. dollar-denominated payments and facilitate settlement on a near-real time, 24 hours a day, 7 days a week basis.” They recommended further exploration including alternative models and technologies that were out of the PoC scope “but could offer similar improvements for wholesale payments and settlements.”

The legal workstream looked at the application of U.S. rules and regulations to the RLN system. It found that using shared ledger technology such as tokens to record and update the ownership of central bank and commercial bank deposits “should not alter the legal treatment of such deposits,” and did not identify “any insuperable legal impediments under existing U.S. legal frameworks that would prevent the establishment of an RLN system as contemplated in the PoC.”

The NYIC said that the proof-of-concept was “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 Fed announced the launch of the pilot project on Nov. 15, 2022, shortly after the announcement of the launch of Phase II of Project Cedar, a New York Fed study exploring the feasibility of a wCBDC for cross-border settlements between international banks using different national currencies. The results of Phase II of Project Cedar were released on May 18.

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