The New York Federal Reserve and the Monetary Authority of Singapore (MAS) have released a groundbreaking report on the potential of central bank digital currencies (CBDCs) to transform cross-border and cross-currency payments. The research was first announced in November 2022.
The report, a result of their joint research effort known as Project Cedar/Project Ubin, showcases the successful execution of near real-time settlement finality using different distributed ledger technology (DLT) and hashed timelock contract (HTLC) stacks.
Researchers focused on studying technical issues and did not indicate specific plans for implementation. However, their findings shed light on the immense possibilities that CBDC systems operating on various networks can offer in terms of interoperability and atomic settlement for cross-border transactions.
One significant aspect of the research involved the use of hashed timelock contracts, a type of smart contract, to bridge ledgers with distinct underlying DLT systems. This successful demonstration showcased the establishment of interoperability across different technical designs, raising hopes for seamless CBDC transactions between countries with varied infrastructure.
To assess interoperability hypotheses, the researchers devised eight different scenarios, all of which yielded promising results. The atomic settlement tests revealed an average settlement rate of nearly 6.5 payments per second, reaching a peak of 47 payments per second. These end-to-end transactions achieved an impressive average payment latency of less than 30 seconds.
Michelle Neal, Head of the New York Fed’s Market Group, emphasized the significance of cross-border payments, referring to them as a “major railway” for the global economy. She believes that the research collaboration with MAS highlights the potential for central bank innovation to enhance wholesale payment flows globally and improve settlement outcomes.
MAS Deputy Managing Director Leong Sing Chiong expressed a vision for a future digital currency landscape that enables interoperability of wholesale CBDCs without the need for a common infrastructure. This innovation could significantly streamline cross-border payment flows, particularly for less liquid currencies, revolutionizing global financial transactions.
The implications of this research extend beyond the experiment itself. The successful execution of cross-border CBDC payments across different technical platforms opens doors for greater collaboration between central banks worldwide. Such experiments are crucial for advancing CBDC development, fostering financial inclusion, and enhancing global economic stability.
As central banks continue to explore CBDCs, the potential benefits of interoperability and near real-time settlement become increasingly apparent. The findings from the New York Fed and MAS joint research lay a strong foundation for the future implementation of CBDC systems that could revolutionize cross-border transactions, making them more efficient, transparent, and accessible to all.
In a rapidly evolving digital landscape, the pursuit of innovative payment solutions becomes essential for countries seeking to stay at the forefront of the global economy. The collaboration between the New York Fed and MAS represents a significant stride forward in harnessing the potential of CBDCs, reinforcing the transformative power of digital currencies in reshaping financial systems worldwide.