The Federal Reserve Bank of New York's Innovation Center released a report on the first phase of its Project Cedar wholesale central bank digital currency (wCBDC) on Nov. 4. The Fed still has no plans to issue a CBDC, NY Fed Executive Vice President and Head of Markets Michelle Neal said at a presentation in Singapore, but it has investigated foreign exchange spot settlement “from the perspective of the Federal Reserve.” Its prototype wCBDC, intended for use by financial institutions rather than the public, was able to implement transactions dramatically faster and more securely than the current standard.
A foreign exchange spot transaction was chosen as the use case for the 12-week first phase of Project Cedar because of its relative simplicity and the fact that this type of transaction is often used as part of broader, more complex transactions. It also represents a market with $7 trillion in daily turnover with less than 40% of it settled on a payment-versus-payment basis and transactions typically taking two days.
Project Cedar used a specially designed distributed ledger to carry out transactions between different currencies on different ledgers. It was a permissioned blockchain network with an unspent transaction data output model. In test scenarios, FX spot trades were atomically settled, that is simultaneously or else the transaction fails, in under ten seconds, with throughput increasing as the number of currencies increased.
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Director of the NY Fed Innovation Center Per von Zelowitz said in a statement:
“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.”
The NY Fed Innovation Center was established in 2021. Project Cedar complements the Boston Fed’s workon a retail CBDC in Project Hamilton, being conducted in conjunction with the Massachusetts Institute of Technology’s Digital Currency Initiative. That project released its first results in February. CBDC research is being actively pursued by the vast majority of central banks worldwide.