CBDCs Could Reduce FX Transaction Speeds to 10 Seconds, NY Fed Says

Foreign exchange transactions could drop from a two-day process to less than 10 seconds if central bank digital currencies (CBDC) were involved, according to an experiment conducted by the Federal Reserve Bank of New York.

Project Cedar, a research effort launched by the N.Y. Fed’s New York Innovation Center (NYIC), tested the speed of FX transactions using distributed ledgers, finding that in a simulated example, they could lower the speeds of transactions with multiple participants and observers. The project intended to research the benefits of wholesale CBDCs, according to a brief report published Friday.

Each participant operated its own version of the ledger, rather than having the participants act as nodes in a single distributed ledger, the report said. Nevertheless, the participants were able to settle both sides of transactions simultaneously, finding a massive speed boost compared to the current system. While the report detailed some of the technical aspects of the test – it used an undisclosed permissioned blockchain network and was written in the Rust programming language – it did not provide many details about how the simulation was conducted or how they confirmed transaction settlements.

This first phase saw each participant run “homogenous” ledgers, but future tests will see participants running different networks to test for cross-chain compatibility.

The Federal Reserve has been grappling with the question of whether it can or should issue a CBDC for years. While the Biden administration has indicated that the Fed should do so if it’s in the "national interest," and various Fed branches – including Boston’s – have been conducting research, Fed officials have indicated they’ll wait for Congress to authorize a digital dollar before moving forward. This week’s report said it’s not meant to push for a particular outcome.

In a speech discussing the latest research, Michelle Neal, the head of the markets group at the N.Y. Fed, said the central bank branch wanted to test the technology from its own perspective to see if it could address concerns about risk and scalability.

“This indicates that a modular ecosystem of ledgers has the potential for continued scalability, and that distributed ledger technology could enable settlement times well below the current industry standard of two days, with the added guarantee of atomic settlement,” she said.

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