It was not that long ago that everybody was wondering what CBDC (Central Bank Digital Currency) was – furthermore, many who did no saw no real application for it behind the then burgeoning cryptocurrency market.
Project Cedar is a multiphase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC) in the Federal Reserve context through exploration of fundamental design choices and modular technical features.
Phase I of the Project Cedar experiment examined the potential application of distributed ledger technology, specifically blockchain, to enhance the functioning of cross-border payments.
The 12-week experiment included the development of a wholesale CBDC prototype and revealed that wholesale cross-border digital currency transactions supported by blockchain technology can deliver fast and safe payments.
The report released today summarises the problem space, hypothesis, design and results of the experiment conducted in Phase I, which focused on a wholesale cross-border payments use case.
In Project Cedar Phase I, the experiment simulated a foreign exchange (FX) spot trade and introduced a wholesale central bank digital currency prototype to test whether using blockchain technology could improve speed, cost, and access to cross-border wholesale payments.
FX spot trades are among the most common wholesale cross-border transactions, as they are often required to support broader transactions, such as for international trade or foreign asset investment.
While these payment systems function well, there is opportunity for improvement around settlement. Currently, it takes two days for most FX spot trades to settle.
During this period, payment senders and recipients are exposed to settlement, counterparty, and credit risk which, among other things, can hinder an institution’s ability to readily convert its assets into cash.
Back in Europe and its the BIS who are leading the charge. Tourbillon, a new project launched by the BIS Innovation Hub’s Swiss Centre, explores how to improve cyber resiliency, scalability and privacy in a prototype CBDC.
Central banks have identified cyber resiliency, scalability and privacy as core features of CBDCs. However, designing them involves complex trade-offs between these three elements.
For example, higher resiliency against cyber-attacks, especially from quantum computers, requires additional cryptography, which can slow down payment processing.
Privacy must be weighed against the need to counter money laundering, terrorism financing and other illicit payments.
Project Tourbillon aims to reconcile these trade-offs by combining proven technologies such as blind signatures and mix networks with the latest research on cryptography and CBDC design suggested by researchers David Chaum and Thomas Moser (see eCash 2.0).
Cyber resiliency supports safe and effective digital payments infrastructures. The project achieves this by experimenting with the strongest known type of quantum-resistant cryptography.
Scalability accommodates the potential for high transaction volumes. Tourbillon achieves this by using an architecture that is compatible with, but not based on, distributed ledger technology. By making each transaction separate, the system resources scale linearly. The project seeks to verify the linear scalability of the design with realistic parameters.
Privacy is an important user requirement but at the same raises issues with regards to countering illicit activities. Tourbillon resolves this by providing privacy for the payment sender but not for the recipient. Regulatory and compliance checks will continue to apply.
Speaking of the Cedar project, Per von Zelowitz, Director of the New York Innovation Center, said “Safe and efficient cross-border payments are critical to the functioning of the global economy.”
“Project Cedar Phase I revealed promising applications of blockchain technology in modernizing critical payments infrastructure, and our inaugural experiment provides a strategic launch pad for further research and development regarding the future of money and payments from the US perspective.”
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