The Federal Reserve Bank of New York has started a 12-week proof of concept project with several large banks to study the feasibility of using distributed ledger technology to manage a digital dollar. The so-called “regulated liability network” pilot will be conducted in a test environment and use simulated data. The pilot will test how banks using digital dollar tokens in a common database can speed up payments. Participating banks include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo. The proof-of-concept project is a 12-week effort that will test the feasibility of an interoperable digital money platform called the regulated liability network (RLN). It will use a distributed ledger—like the blockchain technology behind bitcoin.
The Federal Reserve Bank of New York initiated a 12-week pilot program with nine major financial institutions to test digital currencies as a form of payment. Ten members of the banking community are working with the New York Innovation Center (NYIC), which is part of the Federal Reserve Bank of New York, to explore the feasibility of the regulated liability network (RLN) — an interoperable digital money platform. Earlier this month, Michelle Neal, head of the New York Fed’s market’s group, said it sees promise in using a central bank digital currency (CBDC) to speed up settlement time in currency markets. Many banks are evaluating their exposure to digital assets and the underlying technology as it relates to the speed of transactions as well as the ability to offer new digital currency-related products that may potentially attract more customers. “This project will be conducted in a test environment and only use simulated data,” the group notes. “It is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a retail or wholesale CBDC, nor how one would necessarily be designed.”
All of the firms will participate in the project and use simulated data in a test environment. Banks will issue tokens which will be processed through a simulated central bank. Private equity, venture capital and even large family offices are always looking for the right opportunities to invest and have been very active in the digital assets space, specifically with technology platforms that support digital currencies. While the crypto market is shaken to its core by the failure of FTX, traditional financial institutions are taking a step into the world of digital currency. The nine institutions will explore how to use a regulated liability network and test the distributed ledger system’s ability to exchange and use information concurrently. With the White House recommending the creation of a digital dollar, a major announcement could come as early as next year.
These policy objectives formed the foundation for the currency’s technical design choices. A U.S. CBDC could affect the financial structure of the U.S. and alter the duties and responsibilities of the private sector and the central bank. As digitalization continues to impact the future of money and the exchange of value, effective policy and regulation are needed to ensure a stable and equitable financial system. Bank of New York Mellon, the money-laundering bank of the world, HSBC Holdings, PNC Financial Services, Toronto-Dominion Bank, Truist Financial and U.S. Bancorp are also participating in the test, along with payments network Mastercard.
The findings of the pilot project will be released after it concludes. The recent bankruptcies of large crypto-native organizations will likely expedite the regulatory process globally and create a market void, potentially encouraging traditional financial services companies to enter the marketplace on their own, well regulated, terms. There is still significant uncertainty in the crypto market, fueled by a combination of mistakes, lack of corporate governance, malicious activity and fraud. While regulators are looking to provide guidance for conduct, the digital assets industry is expected to lead the charge by setting and implementing strong standards for corporate governance.
The order also pointed to the need for technical experts with good money and payment systems knowledge to oversee the technology involved in building the U.S. The order’s digital assets R&D agenda is concerned with how cryptography technology can help develop a CBDC that matches the Federal ResReserve’sssion. The new network is meant to follow existing laws and regulations for deposit-based payments processing, including anti-money-laundering requirements.
A U.S. CBDC would serve as a complement to existing central bank reserve account balances and widely used fiat currency. As a bonus, it should provide a medium for executing instant and seamless cross-border transactions. BNY Mellon, Citigroup, HSBC, Mastercard, PNC Financial Group, TD Bank, Truist Financial, U.S. Bancorp and Wells Fargo will participate in the pilot by issuing tokens and settling transactions through simulated central bank reserves. The program will test the “technical feasibility, legal viability, and business applicability” of distributed ledger technology, as well as simulate tokens and explore regulatory frameworks. The center said it has found that it takes transactions on a distributed ledger system that’s enabled through the blockchain under 15 seconds to settle on average. The recipient and sender settle their transaction at the same time – or not at all.
Nine U.S. financial institutions, including Citibank, Wells Fargo, and Mastercard launched a pilot program working with the Federal Reserve Bank of New York to test the feasibility of a digital dollar based on distributed ledger technology. The proposed RLN would use distributed ledger technology to improve financial settlements and would include central banks, commercial banks and regulated non-banks, the participating firms said Tuesday (Nov. 15) in a press release. “Projects like this, that focus on the digitization of central bank money and individual bank deposits, could be expanded to take a broader view of the opportunity.” The group says the RLN will run for twelve weeks and only operate in U.S. dollars. Participants will issue simulated digital tokens representing customer deposits and settle through simulated central bank reserves on a shared blockchain. The U.S. dollar will be represented as tokens and settled through simulated central bank reserves on a shared multi-entity distributed ledger.
