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The Federal Reserve of New York has launched a new pilot that will study the feasibility of interoperable central bank digital currency (CBDC) and commercial bank digital money.
Known as the Regulated Liability U.S. Pilot, the 12-week pilot will test whether wholesale CBDC can operate on a shared multi-entity ledger with commercial bank digital money.
The pilot will be led by the New York Innovation Center (NYIC), a subsidiary of the New York Fed, and banking participants will include BNY Mellon, Citi, HSBC, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo.
Other participants include Mastercard, SWIFT and digital asset issuance and custody firm SETL. Legal services will be provided by Sullivan & Cromwell LLP, and advisory services will be provided by Deloitte.
In a statement, the NYIC said the US proof-of-concept will experiment with the idea of a hybrid “regulated liability network”.
It will test the technical, legal and business aspects of distributed ledger technology (DLT) to settle the liabilities of regulated financial institutions through the transfer of central bank liabilities.
The project will be conducted in a test environment and will only use simulated data. The NYIC said the pilot is not intended to advance any specific policy outcome and it is not intended to signal that the US Federal Reserve will make any imminent decisions about the appropriateness, design or issuance of CBDC.
"The NYIC looks forward to collaborating with members of the banking community to advance research on asset tokenization and the future of financial market infrastructures in the U.S., as money and banking evolve," said NYIC director Per von Zelowitz.
Problems and solutions
The main thesis of the pilot is that although DLT enables a common source of truth for asset and payment exchange, current DLT designs do not enable interoperable transfer and settlement of digital assets between regulated financial institutions.
The NYIC, therefore, proposes a regulated liability network as a financial market infrastructure (FMI) that can facilitate digital asset transactions using DLT, thereby connecting with deposits held by regulated financial institutions.
“This theoretical FMI provides a multi-asset, always-on, programmable infrastructure containing digital representations of central bank, commercial bank and regulated non-bank issuer liabilities, denominated in U.S. dollars,” said the NYIC.
“The proof-of-concept will build a prototype for a DLT-based network and test the feasibility of payments between financial institutions using tokenized regulated liabilities on the regulated liability network.”
Following the proof-of-concept, the NYIC said it will publish a report summarising its findings and offering a legal assessment of the settlement mechanisms provided by the regulated liability network, including delivery versus payment (DvP) and payment versus payment (PvP).
Familiar partners
Many of the participants involved in the NYIC pilot have either worked together on previous digital asset initiatives, or have already pursued their own ventures in digital asset infrastructure.
Last month, SWIFT announced that it has successfully partnered with 14 central and commercial banks, including HSBC and Wells Fargo, on interlinking CBDC networks and facilitating fiat-to-CBDC flows with a real-time gross settlement system.
Tom Zschach, chief innovation officer at SWIFT, said the experiments showed that different CBDC networks around the world can be interlinked not just with each other, but also with existing payment systems and all through a single gateway.
“We see inclusivity and interoperability as central pillars of the financial ecosystem, and our innovation is a major step towards unlocking the potential of the digital future,” said Zschach.
In a separate set of experiments, SWIFT collaborated with Citi, Clearstream, Northern Trust and SETL to assess how its existing infrastructure can be used as a single access point to multiple tokenisation platforms.
The experiments successfully carried out 70 scenarios that simulated a range of issuance, DvP and redemption processes of tokenised bonds, equities and cash. The experiments used established forms of payment and CBDC.
Marjan Delatinne, head of payments at SETL, said: “We are entering a pivotal moment of history by connecting the dots between SWIFT and the new tokenised world.
“This experiment could lay the foundation for universal interoperability between participants and systems during the transactional lifecycle of tokenised assets.”
Also last month, as reported by VIXIO, BNY Mellon launched its Digital Asset Custody platform, allowing clients to hold and transfer bitcoin and ethereum.
The platform, which is a product of BNY Mellon’s Digital Assets Unit that was formed in 2021, also benefited from input by Fireblocks and Chainalysis on security and compliance respectively.
Similarly, last month Mastercard launched Crypto Source, a new programme that aims to help financial institutions provide secure crypto trading capabilities and services to customers.
Mastercard’s range of crypto-related offerings for banks and fintechs now includes security management, identity solutions, crypto analytics, transaction monitoring, anti-money laundering and "know your business" features, cybersecurity and biometrics.
