Wall Street tests cryptocurrencies with the Fed

Programmable digital dollars are coming

The New York Innovation Center will study the feasibility of a theoretical payment system designed to facilitate and settle digital asset transactions.

According to a statement from the New York Fed, the global banking giants are launching a 12-week digital dollar (CBDC) pilot with the Federal Reserve Bank of New York.

Citigroup, HSBC Holdings, Mastercard and Wells Fargo are among the financial firms participating in the experiment along with the New York Fed, which will make a “public contribution to the body of knowledge on the application of new technologies to the regulated financial system”.

Also participating in the test are Bank of New York Mellon, the global anti-money laundering bank, HSBC Holdings, PNC Financial Services, Toronto-Dominion Bank, Truist Financial and US Bancorp, along with payment network Mastercard.

The project, called the Regulated Liability Network, will allow banks to simulate issuing digital currency representing their customers’ net worth before settling it through central bank reserves on a distributed ledger, the New York Fed said .

The pilot will test how banks using digital dollar tokens in a common database can help speed up payments.

“Programmable U.S. digital dollars (CBDC) may be needed to support new business models and provide a foundation for much-needed innovations in settlements and financial infrastructure,” said Tony McLaughlin, managing director of emerging payments and business development at the US. treasury solutions and trading division of Citigroup. “Projects like this, focused on digitizing central bank money and individual bank deposits, could be scaled up to take a broader view of the opportunity. »

Earlier this month, Michelle Neal, head of the New York Fed’s markets group, said using a central bank digital dollar (CBDC) to speed up settlement times in currency markets was a promising boon .

For years, major Wall Street banks have been exploring the use of blockchain in their businesses for everything from interbank payments to mortgages and cross-border transactions. Yet this week’s move comes amid a rout in the cryptocurrency markets following the collapse of Sam Bankman-Fried’s (FTX) digital assets empire last week.

In addition to balancing compliant CBDCs and stablecoins, “there should be the ability to leverage the scale and economic value of bank deposits,” said Raj Dhamodharan, head of cryptocurrencies and blockchain at MasterCard. The Regulated Accountability Network “is an innovative, industry-led proof of concept that could help determine how consumers and businesses view the credibility of token-based payments. »

The new network is expected to comply with applicable laws and regulations for processing deposit-based payments, including anti-money laundering requirements. After the 12-week test, banks will release the results, the statement said, although lenders “are not engaged in any future stage of work” once the test is complete.

Initial work will focus on simulating digital currency issued by US dollar-regulated institutions, but the concept could be extended to multi-currency operations and stablecoins, which are typically backed by another asset such as dollars or euros. .

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