Pilot project for the digital US dollar starts!

2022-11-17

The US Federal Reserve (Fed) of New York is launching a digital US dollar pilot project in cooperation with 12 global financial firms. This is according to a statement published on Tuesday. Among others, the major bank HSBC, the payment service provider Wells Fargo and the financial service provider Mastercard are on board. The New York Innovation Center (NYIC), which was founded in 2021 for a strategic partnership between the New York Fed and the Bank for International Settlements (BIS), is providing support.

Pilot project for transactions between financial institutions

The pilot project will last twelve weeks and will be conducted in a test environment with simulated data. It only concerns transactions between financial institutions ("wholesale transactions") and not the use of the digital US dollar for citizens.

It tests how transactions can be carried out more effectively in a common database with a digital US dollar.

"The New York Innovation Center (NYIC) is participating with members of the private sector in a proof-of-concept project to explore through feasibility an interoperable network of central bank digital liabilities and commercial bank digital money using distributed ledger technology."

Announcement by the Fed of New York

The first results are then to be published after the twelve weeks.

The Fed Just Launched the Digital Dollar

The USA is taking its time

Earlier this year, the Fed had published a paper discussing the benefits, but also the potential risks, of a central bank digital currency (CBDC). The government has not yet made a decision on whether to introduce a CBDC at all. Thus, the Fed will have to wait for the green light from Washington to launch a broad-based project.

However, the Fed currently seems to be primarily concerned with efficiency gains through the use of a digital US dollar. Michelle Neal, senior vice president and head of the New York Fed's markets group, commented earlier this month on the benefits of a digital US dollar for faster settlements in foreign exchange markets, Reuters reported. Neal explained that the settlement time of the digital US dollar is on average ten seconds, instead of two days, as is currently the case.

In other countries, however, such as China or Nigeria, a digital central bank currency is already used by parts of the population. In the euro area, the launch of a digital central bank currency is planned for 2026.

Conclusion

With a digital US dollar, cross-border transactions could be processed more quickly than is the case today. Presumably, no one has anything against efficiency gains either.

Nevertheless, any development around CBDCs should be watched. Even if a digital US dollar is only used for transactions between financial institutions for the time being, we are one step closer to the dystopia we feared. With the widespread roll-out of a digital central bank currency, every transaction by citizens would be directly traceable by the state. An alternative would of course be Bitcoin, which also allows cross-border transactions in seconds using the Lightning network and at the same time protects the privacy of citizens.