The Federal Reserve Bank of New York has announced that its New York Innovation Centre (NYIC) is working with some of the world’s biggest banks to explore the feasibility of an interoperable network of central bank wholesale digital money and commercial bank digital money using distributed-ledger technology.
The 12-week proof-of-concept initiative is one of the first projects to be publicised by the NYIC – the partnership between the New York Fed and the Bank for International Settlements (BIS) Innovation Hub network that was launched last year – and involves experimentation with a nascent concept known as a regulated liability network (‘RLN’).
The ‘Regulated Liability Network US Pilot’ will test the technical feasibility, legal viability and business applicability of distributed-ledger technology (DLT) to settle the liabilities of regulated financial institutions through the transfer of central bank liabilities.
The project will consist of three workstreams – technology, organisation and settlement – that aim to: assess the feasibility of DLT to enable the base use case; illuminate technical and functional design considerations for the concept; and gain insight into the value of other potential use cases. Work will take place in a test environment using simulated data.
Financial services powerhouses involved include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank and Wells Fargo. The technology is being provided by London-based blockchain firm SETL and New York-based Digital Asset (see Global Government Fintech’s boxout at the end of this article), as well as Amazon Web Services (AWS), while Belgium-headquartered global financial messaging service provider SWIFT is helping to facilitate international interoperability. Deloitte is providing ‘advisory services’.
‘Multi-asset, always-on, programmable infrastructure’
Distributed ledgers enable a common ‘source of truth’ for asset exchange, as well as advancements in payments such as DvP (delivery-versus-payment) and PvP (payment-versus-payment) settlement, a dedicated project page on the NYIC’s website explains. ‘However, current designs for exchange mechanisms based on DLT do not enable interoperable transfer and settlement of digital assets between regulated financial institutions.’
The project webpage goes on to describe the pilot as exploring a theoretical financial market infrastructure (FMI) that provides a ‘multi-asset, always-on, programmable infrastructure’ containing digital representations of central bank, commercial bank and regulated non-bank issuer liabilities, denominated in US dollars.
“The NYIC looks forward to collaborating with members of the banking community to advance research on asset tokenisation and the future of financial market infrastructures in the US as money and banking evolve,” said Per von Zelowitz, who was appointed as the NYIC’s inaugural director last year, in a NYIC press release.
Von Zelowitz – who previously worked in the private sector for PwC, and, before that, for Citi Ventures in the role of ‘senior entrepreneur in residence’ and founding member of D10X, Citigroup’s corporate incubator – said last year during a virtual event to formally launch the NYIC that collaboration would be “absolutely a critical success factor”.
A press release from the banks involved in the pilot, adds that the proof-of-concept will include dialogue with the ‘broader US banking community, including community and regional banks’. It also states that banking participants are not committed to any future phases of work after the pilot.
NYIC’s cross-border explorations
The announcement of the project comes hot on the heels of the NYIC’s ink-up with the Monetary Authority of Singapore (MAS) to investigate how wholesale CBDCs could improve the efficiency of cross-border (wholesale) payments involving multiple currencies.
‘Project Cedar Phase II x Ubin+’ will ‘enhance designs’ for atomic settlement of cross-border cross-currency transactions, according to the two authorities, which said the collaboration is looking to ‘provide further visibility into the functionality and interoperability of multi-currency ledger networks utilising their own unique designs’. A report detailing this experiment and findings will be released in 2023.
Project Cedar, which is the NYIC’s inaugural project, is a multi-phase programme to develop a technical framework for a theoretical wholesale CBDC in the Federal Reserve context.
In its first phase, a prototype for a wholesale CBDC was developed to demonstrate blockchain’s potential to improve the speed, cost and access of one of the most common wholesale cross-border payments: a foreign exchange (FX) spot transaction. The prototype included design choices such as a permissioned blockchain network, an Unspent Transaction Output (UTXO) data model and Rust as primary programming language. The 12-page ‘Project Cedar – Phase One Report’ provides details.
The multi-pronged ‘Ubin+’ project was unveiled by MAS during the recent Singapore FinTech Festival.
*** In a separate development in the US, the Financial Industry Regulatory Authority (FINRA) has launched a ‘machine-readable rulebook’ with the aim of enhancing firms’ compliance efforts, reduce costs and help with risk management.
SETL and Digital Asset’s link-up
- SETL and Digital Asset announced in February 2022 that they had formed a partnership to create a new protocol that can be used by regulated institutions to launch interoperable tokens.
- The two companies announced that the protocol was modelled on a regulated liability network (RLN) initiative proposed by Citibank payment innovation specialist Tony McLaughlin.
- The joint-announcement followed a SETL publication (‘The Regulated Liability Network: white paper on scalability and performance’) in December 2021 highlighting tests of its version of a RLN implemented on AWS infrastructure and delivering a sustained volume of more than one million transactions per second.
- In February SETL’s chief executive, Philippe Morel, described “real momentum behind the RLN model” while the company’s chief engineer, Anthony Culligan, said the RLN approach “finally gives regulated institutions a token network that is fit for purpose” and “lines up technology and regulation in a way that other blockchains simply fail to match.”
- SETL was acquired by Turkey-based firm Colendi in June.
‘New York fintech innovation centre director sets out priorities’ – our news story (1 December 2021) on the NY Fed-hosted virtual event to formally launch the NYIC