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The New York Fed's Experiment with Digital Assets Payments
The New York Federal Reserve, in collaboration with several large U.S. banks, recently announced the successful completion of a months-long experiment using tokenised dollars for faster settlement.
This project, referred to as a "regulated liability network" (RLN), tested five key areas: programmability, privacy, interoperability with other wholesale payments systems, availability at all times, and speed in settlement.
The experiment involved both domestic and international payments between major financial institutions, including non-bank financial companies. However, it's important to note that this does not indicate that the Fed has decided to issue a central bank digital currency (CBDC). The experiment merely used a CBDC as a proof-of-concept for using the technology between central banks and commercial banks.
The Regulated Liability Network (RLN)
The RLN is a potential alternative to unregulated tokens like Bitcoin and even to the CBDCs that many of the world's central banks are exploring. The premise is that central bank money, commercial bank money, and electronic money — issued by regulated non-bank payment firms — could all exist on the same distributed ledger.
The RLN experiment involved major lenders such as Citi, Bank of America, BNY Mellon, and HSBC, alongside payments specialists Mastercard and Swift. The results of this experiment are expected to be announced soon.
The Digital Dollar Experiment
In another experiment, the New York Fed tested a digital dollar for complex foreign exchange transactions running across different blockchains. The experiment, known as Project Cedar: Phase One, focused on the potential for CBDCs to become viable options for large foreign currency transactions.
The pilot managed to reduce the average clearing and settlement of transactions from two days to under 15 seconds. This experiment demonstrated the potential for an American CBDC to improve large-scale cross-border payments.
The Road Ahead
While these experiments have shown promising results, it's crucial to remember that they are just that — experiments. The creation of a digital dollar is not a foregone conclusion, and the adoption of digital assets for payments on a large scale will require careful consideration and further testing.