A division of the Federal Reserve Bank of New York has concluded a monthslong test on the viability of a digital dollar, according to Bloomberg. The experiment, carried out at the Fed’s New York Innovation Center, focused on a technology called a regulated liability network, which allows banks to issue digital money representing their customers’ funds. The Fed concluded that digital dollars could significantly improve wholesale payments—in particular— cross-border payments.
“The high-level news from the New York Fed’s pilot is that a digital currency has real applications and is technically and legally possible,” said James Wester, Head of Cryptocurrency at Javelin Strategy & Research. “That won’t be a surprise to anyone who has paid attention to the digital asset space for any length of time.”
Currently, the process of sending money overseas can be slow and cumbersome due to the diverse systems used by banks and governments worldwide. The use of digital dollars on a shared ledger has the potential to revolutionize this process by synchronizing dollar-denominated payments and enabling near-real-time settlement.
With the increasing shift to digital, the financial industry has been exploring ways to leverage technology to improve payment systems. The rise of cryptocurrencies and blockchain technology has sparked innovation, with many financial institutions and technology companies exploring the potential of digital currencies. The NY Fed’s experiment adds to this growing body of research and demonstrates that regulated digital currencies, such as digital dollars, can offer tangible benefits in terms of speed, efficiency, and security.
It’s worth noting that the test was conducted on a private blockchain, requiring permission to participate, rather than using public blockchains associated with cryptocurrencies. This choice reflects the cautious approach of central banks and financial institutions, who are prioritizing regulatory compliance and privacy in their digital currency experiments.
Despite the positive findings of the test, the NY Fed emphasized that it does not indicate an imminent decision to issue a central bank digital currency (CBDC). The experiment was a proof of concept to evaluate the feasibility and benefits of digital dollars, rather than a policy announcement.
“While there are differences in technical terms across different shared ledger approaches, that overarching message coming from the New York Fed’s pilot—that a shared ledger visible to all participants can yield improvements to payment use cases—is what the crypto space has been arguing for the better part of a decade,” Wester said. “This pilot is simply a further validation of that idea. Whether or not this technology should be used to deliver a central bank digital currency is now a political question.”
