The objective is to test “the technical feasibility, the legal viability and its commercial legitimacy”, according to the institution. The project must provide a proof of concept that will prepare the ground for the development of a digital dollar using distributed ledger technology (DLT), different from the blockchain. At the end of the experiment, the NYIC will publish a detailed report of the results and the data collected during the test.
The project consists of simulating an “interoperable network” between the central bank and commercial private banks to generate a large volume of transactions with tokens, on a decentralized and secure digital platform.
The Fed clarified that the experiment is carried out using simulated data and that it will not necessarily lead to the official creation of a digital dollar by American financial institutions.
Michelle Neal, head of the New York Fed’s market group, said using a central bank digital dollar to speed up settlement times in currency markets was a promising avenue. “This could enable a more efficient payment system, provide a foundation for new technological innovations and facilitate faster cross-border transactions,” she said in a speech at the Singapore Fintech Festival in early November.
“Programmable U.S. digital dollars (CBDCs) may be needed to support new business models and provide a foundation for much-needed innovations in financial settlements and infrastructure,” Tony McLaughlin, Chief Payments Officer, told Business Insiders. Emerging Markets and Business Development at Citigroup’s Treasury and Commerce Solutions division.
After China, India and France
It was last March that the Biden administration asked the New York Fed to study the steps needed to implement a central bank digital currency (MNBC).
The challenge is to offer a new means of payment that is secure, fast and stable. This is not the case with current cryptocurrencies, whose prices are subject to strong variations.
The MNBC project also aims to strengthen the place of the United States in the decentralized finance sector. The country of Uncle Sam does not want to be behind in the race.
More than 140 million Chinese people are already using the digital yuan launched by China in April 2020. India has recently launched an e-rupee project in four major cities. The Banque de France has announced the digital euro for 2027.
The US initiative comes amid a climate of concern and suspicion in the financial sector towards digital currencies. It comes a few days after the bankruptcy of the FTX cryptocurrency platform, which further undermined the already wavering confidence of institutions in virtual currency.
Since its emergence, the young sector of decentralized finance has worried central banks, because of the many security flaws in the technologies it uses. This is why US parliamentarians have proposed creating a digital dollar that is not blockchain-based.
The entry of Americans into the race for the digital dollar has not yet prompted the Bank of Canada to reconsider its position on the subject. The institution does not intend to develop an MNBC. Rather, it is preparing to create its own digital currency, in the event that cash becomes little or no longer used, or private cryptocurrencies make a breakthrough.