Project Cedar is the inaugural project of the New York Innovation Center (NYIC). This is a multi-phase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC) in the context of the Federal Reserve.
During Phase I of the Cedar Project, a prototype wholesale central bank digital currency was developed to demonstrate the potential of blockchain to improve speed, cost and access to a critical component of the cross-border payments market. wholesale – a foreign exchange ( FX) cash transaction.
Wholesale cross-border payments are financial transactions between central banks, private sector banks, corporations and other institutions based in separate jurisdictions. Spot foreign exchange transactions are among the most common wholesale cross-border payments, as they are often needed to support broader transactions, such as international trade or investment in foreign assets.
Although cross-border payments are working well, there are opportunities for improvement. Typically, it takes about two days for a spot FX transaction to settle. During these two days, counterparties are exposed to settlement, counterparty and credit risk which, among other things, can impede an institution’s ability to access liquidity.
As part of a simulation of a wholesale cash FX transaction, Project Cedar developed a prototype wholesale central bank digital currency to test whether blockchain technology can provide fast and secure payments. The core of Project Cedar’s solution concept was the Distributed Ledger Infrastructure, a multi-ledger construct in which each currency was kept on a separate ledger, managed by its respective simulated central bank.
The Phase I prototype included design choices such as a permissioned blockchain network, using an unspent transaction output data model (UTXO), and Rust as the primary programming language.
The Cedar project has shown that blockchain-enabled cross-border payments can be faster, simultaneous, 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 regulation: The simulated ledger network enabled atomic settlement, meaning that both sides of the simulated transactions settled simultaneously or not at all, and reduced the risks currently borne by counterparties.
- Safer and more accessible transactions: The design of the distributed ledger system enabled 24/7/365 payments and supported interoperability-related goals by enabling transactions across separate and homogeneous ledger networks representing a variety of financial institutions, including central banks and the private sector.
Phase I of the Cedar project revealed key questions and highlighted areas for additional research, particularly around ledger platform design, interoperability and security. As part of its ongoing research into wCBDC, the NYIC will explore issues related to ledger interoperability and design, including how to achieve concurrency and best enforce atomic transactions across different blockchain-based payments.
Download the Phase I report