Project Cedar is the inaugural project of the New York Innovation Center (NYIC). It is a multi-phase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC) in the context of the Federal Reserve.
In Phase I of the Cedar Project, a prototype for a wholesale central bank digital currency was developed to demonstrate the potential of blockchain to improve speed, cost, and access to a critical element of the wholesale cross-border payment market: a foreign currency. (FX) spot transaction.
Wholesale cross-border payments are financial transactions between central banks, private sector banks, corporations and other institutions based in separate jurisdictions. Foreign exchange spot transactions are among the most common wholesale cross-border payments, as they are often required to support larger transactions such as international trade or investment in foreign assets.
While cross-border payments work well, there are opportunities for improvement. In general, an FX spot transaction takes around two days to settle. During these two days, counterparties are exposed to settlement, counterparty and credit risk which, among other things, can hinder an institution’s ability to access liquidity.
In a simulated wholesale FX spot transaction, Project Cedar developed a prototype wholesale central bank digital currency to test whether blockchain technology can deliver fast and secure payments. The core of Project Cedar’s solution concept was the distributed ledger infrastructure, a multi-ledger construct in which each currency was held in a separate ledger, operated by its respective simulated central bank.
The Phase I prototype included design options such as a permissioned blockchain network, using an unspent transaction output (UTXO) data model, and Rust as the primary programming language.
Project Cedar demonstrated that blockchain-enabled cross-border payments can be faster, more simultaneous, and more secure:
- Faster payments: In the test environment, transactions in the blockchain-enabled distributed ledger system settled in less than 15 seconds on average.
- Atomic Settlement: The simulated ledger network enabled atomic settlement, meaning both sides of simulated transactions were settled simultaneously or not at all, and the risks currently borne by counterparties were reduced.
- Safer and more accessible transactions: The distributed ledger system design enabled payments 24 hours a day, 7 days a week, 365 days a year and supported goals related to interoperability by allowing transactions across homogeneous and separate ledger networks representing a variety of financial institutions, including central and private sector banks.
Phase I of Project Cedar revealed key questions and highlighted areas for further investigation, specifically around accounting platform design, interoperability, and security. As part of its ongoing wCBDC research, NYIC will explore issues related to interoperability and ledger design, including how to achieve concurrency and better enforce atomic transactions across different blockchain-based payment systems.