NYIC Project Settles FX Trades in Under 10 Seconds

The latest central bank study on the future of payments using wholesale central bank digital currencies (wCBDCs) has run phase one of the project, finding that using distributed ledger technology (DLT), FX spot traders can be settled in under 10 seconds.

Project Cedar is the inaugural work of the New York Innovation Centre (NYIC), a joint venture between the Bank for International Settlements’ Innovation Hub and the Federal Reserve Bank of New York, a multi-phase effort to develop a theoretical wCBDC framework to support wholesale transactions such as interbank payment clearing and settlement. The NYIC observes that wCBDCs “have the potential to drive improvement in the larger wholesale market by facilitating the safe, rapid, and efficient transfer of central bank liabilities” and “drive enhancements to existing payments infrastructure and spur future payments innovation”.

The first phase was a 12-week experiment to enable what the NYIC terms “instant and atomic settlement” of FX trades between the New York Fed and counterparties across separate, homogenous ledgers. Based on market throughput estimates, FX spot trades were atomically settled in under 10 seconds, NYIC says, validating the project objectives of enabling instant and atomic settlement using DLT while also revealing promising applications for blockchain in wholesale payments and presenting questions for future research.

In a paper presenting the results of phase one, the NYIC highlights the risks surrounding the current largely two-day settlement model in spot FX markets, it also cites data from the BIS’ Committee for Payments Infrastructure (CPMI) which claims that the  proportion of FX transactions settled in a payment-versus-payment (PvP) basis had fallen below 40% in recent years (a proportion that is disputed by certain firms in the FX industry who cite inter-firm trades that are not routinely subject to settlement risk).

The NYIC adds that it conducted interviews with a range of FX market participants, that ultimately “validated the hypothesis that settlement speed and access to PvP mechanisms are key issues in wholesale cross-border payments”. It further says that based on this research, “a future state solution should enable atomic settlement, access to a wider range of counterparties, and settlement taking place faster than T+2”.

The paper concludes that the results indicate that a modular system of ledgers can be scaled and that DLT could enable atomic settlement if processes such as compliance checks and market making be similarly streamlined. It adds that in addition to meeting the goals of instant and atomic settlement, phase one successfully established a basis for future NYIC research into potential advancements of the systems that move money and other financial assets between banks and financial institutions. “The data produced in this phase represent a benchmark for future testing,” it states. “Importantly, the phase one prototype also demonstrated a successful guide for how wCBDC may be exchanged in a multi-ledger ecosystem. Future research focused on interoperability across a heterogeneous mix of DLT stacks will evolve these findings.”