A Federal Reserve Bank of New York unit will partner with almost a dozen banks and other financial institutions to test out digital dollars, a sign that Wall Street intends to push ahead with its cryptocurrency agenda despite recent upheaval in the market.
Banks including Citigroup and Wells Fargo will work with the Fed's New York Innovation Center on a new network as part of the 12-week test. The technology — known as a regulated liability network — will allow banks to simulate issuing digital money representing their customers' own funds before settling through central bank reserves on a distributed ledger.
The new system could solve problems including the movement of cash across borders, a sometimes lengthy and cumbersome process because of the myriad systems used by banks and governments around the world.
"Programmable U.S. dollars may be necessary to support new business models and provide a foundation to much-needed innovations in financial settlements and infrastructure," Tony McLaughlin, managing director for emerging payments and business development at Citigroup's treasury and trade solutions division, said in a statement Tuesday. "Projects like this, that focus on the digitization of central bank money and individual bank deposits, could be expanded to take a broader view of the opportunity."
For years, Wall Street's biggest banks have explored the use of blockchain in their businesses for everything from interbank payments to mortgages and cross-border trades. Still, this week's move comes amid a rout in cryptocurrency markets following the collapse of Sam Bankman-Fried's digital-asset empire last week.
The tokens involved in the test are different from the FTX token, known as FTT, that was at the center of the exchange's collapse. Instead, each simulated digital dollar will represent one U.S. dollar.
Other participants
Bank of New York Mellon, HSBC Holdings, PNC Financial Services Group, Toronto-Dominion Bank, Truist Financial and U.S. Bancorp are also participating in the test, along with the payments network Mastercard.
In addition to weighing central bank digital currencies and compliant stablecoins, "there should be the option of leveraging the scale and economic value of bank deposits," Raj Dhamodharan, Mastercard's head of crypto and blockchain, said in the statement. The regulated liability network "is an innovative proof of concept led by the industry that could help shape how consumers and businesses view the credibility of token-based payments."
The new network is meant to follow existing laws and regulations for deposit-based payments processing, including anti-money-laundering requirements. After the 12-week test, the banks will publicize the results, they said in a statement, though lenders "are not committed to any future phases of work" once the test is complete.
While the initial work will focus on simulating digital money issued by regulated institutions in U.S. dollars, the concept could be extended to multicurrency operations and stablecoins, which are typically backed one-to-one by another asset such as the dollar or euro.
The New York Innovation Center "looks forward to collaborating with members of the banking community to advance research on asset tokenization and the future of financial market infrastructures in the US as money and banking evolve," Per von Zelowitz, director of the center, said in a statement.
