The Federal Reserve Bank of New York’s Innovation Center of Monetary Policy recently conducted a proof of concept study in collaboration with the U.S. financial services sector. According to a report by the Federal Reserve Bank of New York, the center explored the feasibility of a theoretical payment system using a shared distributed ledger.
“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.
According to the report, the study validated the technical capabilities of the proposed architecture and also highlighted potential improvements in wholesale payments. The study also found no major legal obstacles. The results of the proof of concept study investigated the viability of an interoperable network for wholesale payments that operate on a shared multi-entity distributed ledger. A theoretical payment infrastructure created to allow the exchange and settlement of regulated digital assets was experimented with as part of a research project that was carried out in collaboration with entities from the private sector.
While current payment methods are efficient, there are also still obstacles such as in the areas of speed, cost, accessibility and settlements.
The report stated that three work streams of the study that were led by a cooperative working group examined the technical viability, commercial applicability and legal viability of using shared ledger technology to settle debts of regulated financial institutions by transferring money from the central bank. Simulated data was used in the study and the unit of currency was the U.S. dollar.
The following use cases were tested during the PoC: The first is Domestic Interbank Payments, which was to demonstrate the fundamental operation of the proposed payment system, this use case mimicked USD wholesale payments between commercial banks. Theoretical wholesale central bank digital currency, a tokenized record of a central bank deposit liability, was used to settle transactions that were carried out in commercial bank deposit tokens. Another was Cross-Border Payments in USD. This use case examined the potential of the idea to improve the interaction between international users of USD as a trade and settlement currency. It focused on cross-border wholesale payments in U.S. dollars.
