Project Cedar is the inaugural project of the New York Innovation Center (NYIC). In the context of the Federal Reserve, developing a technical framework for a theoretical wholesale central bank digital currency (wCBDC) is a multi-stage research effort.
In the first phase of the Cedar project, a prototype of a wholesale central bank digital currency was developed to demonstrate the potential of blockchain to improve speed, cost and access to a key element of the wholesale cross-border payments market – foreign exchange (foreign exchange). FX) spot trading.
Wholesale cross-border payments are financial transactions between central banks, private sector banks, corporations and other institutions located in different jurisdictions. Foreign exchange spot transactions are one of the most common wholesale cross-border payments, as they often need to support a wider range of transactions, such as international trade or investment in foreign assets.
While cross-border payments work well, there are still opportunities for improvement. Generally speaking, the settlement time for spot foreign exchange transactions is about two days. During these two days, counterparties are exposed to settlement, counterparty and credit risks that, among other things, can hinder an institution’s ability to access liquidity.
In simulating wholesale FX spot trading, Project Cedar developed a wholesale central bank digital currency prototype to test whether blockchain technology could provide fast and secure payments. At the heart of Project Cedar’s solution concept is a distributed ledger infrastructure—a multi-ledger structure in which each currency is held on a separate ledger, run by its own simulated central bank.
Phase 1 prototypes include design choices such as a permissioned blockchain network, leveraging the Unspent Transaction Output (UTXO) data model, and Rust as the primary programming language.
Project Cedar shows that blockchain-enabled cross-border payments can be faster, more synchronized, and more secure:
- Faster payments: In the test environment, transactions on the blockchain-enabled distributed ledger system settled in less than 15 seconds on average.
- Atomic settlement: The simulated ledger network realizes atomic settlement, and both parties to the simulated transaction either settle at the same time or do not settle at all, reducing the risk currently borne by the counterparty.
- More secure and accessible transactions: The distributed ledger system design supports 24/7/365 payments and supports interoperability-related goals by transacting between independent, homogeneous ledger networks representing various financial institutions, including central banks and private sector banks.
The first phase of Project Cedar revealed key issues and highlighted areas for further research, particularly around ledger platform design, interoperability, and security. As part of its ongoing wCBDC research, NYIC will explore issues related to interoperability and ledger design, including how to achieve concurrency and best execute atomic transactions in different blockchain-based payment systems.
Download the Phase 1 report