New York Fed and Monetary Authority of Singapore Publish Results of Joint Wholesale Cross-Border Payments Research Study

Distributed ledger technology can be used for cross-border, cross-currency payments between different CBDC ledgers, reducing settlement risk and cutting settlement time, according to research from the Monetary Authority of Singapore and the Federal Reserve Bank of New York.

The Federal Reserve Bank of New York’s New York Innovation Center  (NYIC) and the Monetary Authority of Singapore (MAS) today published a research report  detailing the results of the joint Project Cedar Phase II x Ubin+ (Cedar x Ubin+) experiment. The Cedar x Ubin+ experiment examined whether distributed ledger technology (DLT) could be used to improve the efficiency of cross-border wholesale payments and settlements involving multiple currencies. 

The technical research experiment built on previous phases of the NYIC’s Project Cedar  research and the MAS’ Ubin+  initiative. It examined a cross-border multi-currency use case in which vehicle currencies ^[1] are used as a bridge to exchange currency pairs that are not widely traded. Specifically, Cedar x Ubin+ explored the ability of DLT to establish connectivity across heterogeneous simulated currency ledgers, reduce settlement risk, and decrease settlement time. The experiment was conducted in a test environment and the hypothetical payments were settled using simulated wholesale central bank digital currencies ^[2] . 

“Cross-border payments are a major railway for facilitating the functioning of the global economy” said Michelle Neal, Head of the Markets Group at the New York Fed. “Our research collaboration with the MAS reveals key opportunities for central bank innovation to play an important role in easing wholesale payment flows globally and improving settlement outcomes.”

Leong Sing Chiong, Deputy Managing Director (Markets & Development), MAS, said “The Cedar x Ubin+ experiment envisages a future digital currency landscape where central banks can enable interoperability of wholesale CBDCs to facilitate more efficient cross-border payment flows including for less liquid currencies, without requiring a common infrastructure.”

5 The Cedar x Ubin+ experiment demonstrated that DLT could support enhancements to cross-border multi-currency payments and settlements. The findings addressed three key pain points related to network interoperability and autonomy, settlement, and speed:

Interoperability and Autonomy: The Cedar x Ubin + experiment interlinked the distinct central bank currency ledgers, providing flexibility in the design and operation of each ledger to the respective central bank. This enabled payments to be safely executed across multiple ledgers without the need for a central clearing authority or the establishment of a shared central network.

Atomic Settlement: The simulated payments were settled atomically, meaning transactions were only settled if all legs in the cross-currency payment chains were executed successfully. This improved the certainty of settlement, addressing existing pain points such as counterparty risks.

Near Real-Time Settlement: Each simulated payment scenario achieved end-to-end settlement in under thirty seconds on average. This enabled participants to be notified of a payment’s success in a matter of seconds.

The study revealed research areas for future experimentation and analysis, including around the viability of the network solution to manage transaction volumes at scale, with potentially, an increase in payments settled per second and the involvement of additional currencies supported by their corresponding central bank ledgers.

Project Cedar is a multi-phase technical research effort evaluating the potential applications of financial technology solutions to improve the efficiency of wholesale cross-border payments. Phase I of Project Cedar found that wholesale payments supported by DLT could improve the speed and safety of cross-border transactions. 

Project Cedar aims to contribute to a broad and transparent dialogue about innovation in the financial sector. The Cedar x Ubin+ report is not intended to advance any specific policy outcome, nor to signal that the Federal Reserve or the MAS will make any imminent decisions about the appropriateness of issuing a central bank digital currency, or any other product or service, nor indicate how one would necessarily be designed. 

While DLT was explored as a potential solution in Cedar x Ubin+, alternative technical designs may also provide viable solutions. No decisions as to optimal technical design have been made by the Federal Reserve System. 

Ubin+ is MAS’ initiative focused on wholesale digital currency connectivity with international partners to improve the efficiency in cross-border foreign exchange settlement and successful interlinking with diverse DLT and non-DLT financial networks in the future. Its focus includes: the study of business models and governance structures for cross-border foreign exchange settlement, development of technical standards and infrastructure for cross-border connectivity, interoperability and atomic settlement, and establishment of policy guidelines for digital currency infrastructure connectivity across borders.

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1. ^[1] In a foreign exchange trade, a vehicle currency facilitates the indirect conversion between illiquid currency pairs as opposed to a direct trade. For example, for cross-border payments, the sender’s local currency could be first converted to USD or other liquid international currencies, as a common medium of exchange, before it is converted to the beneficiary’s local currency.

1. ^[2] A retail Central Bank Digital Currency (CBDC) is one that is accessible by members of the public, just like cash is today, whereas a wholesale CBDC is one whose access and use is restricted to financial institutions to settle wholesale transactions in the interbank market.