Federal Reserve Bank Of New York Found New Distinctions In Cross-Border Payments In New Study

The Federal Reserve Bank of New York published results from a joint study conducted with the Monetary Authority of Singapore (MAS).

Cross-border and cross-currency payments can effectively utilize Central Bank Digital Currency (CBDC) systems operating on diverse networks, the study shows.

The Federal Reserve Bank of New York is one of the twelve Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System that overseas New York, Fairfield County in Connecticut, twelve northern New Jersey counties, Puerto Rico, and the U.S. Virgin Islands.

Central Bank Digital Currency is a form of a digital currency issued by the country’s central bank. It is similar to cryptocurrency, but is on a fixed value by the central bank and equivalent to the country’s fiat currency.

The Monetary Authority of Singapore is the central bank for the country of Singapore.

The research, part of the Project Cedar/Project Ubin collaborative, demonstrates that distributed ledger tech (DLT) could support enhancements to cross-border multi-currency payments and settlements.

Researchers examined interoperability and atomic settlement using simulated CBDCs and theoretical payments.

“Hashed time lock contracts, which are a type of smart contract, facilitated the successful integration of different DLT systems to carry out simulated cross-border and cross-currency transactions,” The Federal Reserve Bank of New York said in the publication. “Settlement was achieved in under thirty seconds for all test scenarios, including payment chains requiring several cross-ledger currency exchanges.”

This demonstrated that interoperability can indeed exist between ledgers with different technical architectures.

Researchers designed eight distinct scenarios to verify their interoperability hypothesis.

In the atomic settlement tests, an average of nearly 6.5 transactions per second was observed, with a peak capacity of 47 payments per second.

These were end-to-end payments, and the average latency for payment was found to be under 30 seconds.

Michelle Neal, the Head of the New York Fed’s Market Group, says cross-border payments are a “major railway” for the global economy.

“Our joint research with MAS identifies critical opportunities for central bank innovation to ease global wholesale payment flows and enhance settlement outcomes,” she added.

MAS Deputy managing director Leong Sing Chiong explained that the Cedar/Ubin experiment anticipates a future in which central banks could allow the integration of wholesale CBDCs to streamline cross-border transactions, even for less frequently traded currencies, all without the need for shared infrastructure.

The findings of the Ceder/Ubin experiment had three different key points that included interoperability & autonomy, atomic settlement, and near real-time settlement.

Interoperability and autonomy found that the Cedar/Ubin experiment had interlinked distinct to the central bank currency ledgers. The experiment provided flexibility in the design and operation of each ledger to the respective bank.

Atomic settlement sought simulated payments that were settled atomically. Transactions were only settled if all legs in the cross-currency payments chains had successful executions.

Near real-time settlement had simulated payment scenarios that achieved end-to-end settlement under thirty seconds on average.

Produced in association with Benzinga