The New York Innovation Center (NYIC), a branch of the Federal Reserve Bank of New York, and the Monetary Authority of Singapore (MAS) have recently disclosed the findings of their joint Project Cedar Phase II x Ubin+ (Cedar x Ubin+). This project delved into the possibility of utilizing central bank digital currency (CBDC) for wholesale cross-border payments through one or more vehicle currencies.
For those unfamiliar with the term, a vehicle currency is a highly liquid currency that eases the trade between two less liquid currencies. The process involves converting the first low-liquidity currency into the vehicle currency, which is subsequently converted into the second low-liquidity currency. MAS deputy managing director, Leong Sing Chiong, envisions a future digital currency landscape where central banks can attain interoperability of wholesale CBDCs, thereby enabling more efficient cross-border payment flows, even for less liquid currencies. This can be achieved without necessitating a common infrastructure.
The Cedar x Ubin+ project “builds on existing wholesale CBDC research,” with a focus on interoperability, atomic settlement, and near real-time settlement. The project commenced in November and examined various options, ultimately opting for hashed timelock smart contracts to link ledgers on distinct distributed ledger systems, executing simulated cross-border, cross-currency payments. Furthermore, an “off-chain messaging channel” was employed, with the report stating that the solution could function with non-blockchain systems as well.
Both the NYIC and MAS achieved interoperability using hashed timelock contracts across all test scenarios, with payments settling atomically at an average rate of 6.48 payments per second. Additionally, end-to-end settlements clocked in at less than 30 seconds on average.
The MAS initiated its Project Ubin to investigate CBDC back in 2017, while the NYIC was founded in collaboration with the Bank of International Settlements Innovation Hub in 2021. These findings are a significant milestone in the exploration of CBDCs, showcasing potential efficiency gains in cross-border payments. However, the adoption of CBDCs is not without its own set of challenges and concerns.
As central banks continue to experiment with and research CBDCs, questions regarding privacy, security, and the potential impact on financial systems arise. While CBDCs hold the promise of fostering financial inclusion and reducing friction in cross-border transactions, addressing and mitigating these concerns is crucial to ensure widespread adoption and avoid unintended consequences. As the Cedar x Ubin+ project illustrates, collaboration and continuous innovation will be essential to the future growth and stability of the global digital currency landscape.
Source: Cointelegraph
