Casey Wagner

After concluding a three months-long experiment with major banks, the New York Federal Reserve says centralized blockchain payments could help address pain points in the settlement process.



The proof of concept used a “regulated liability network (RLN),” the NY Fed <a href="https://www.newyorkfed.org/aboutthefed/nyic/facilitating-wholesale-digital-asset-settlement">said</a> in a statement Thursday, to create “a theoretical payment infrastructure designed to support the exchange and settlement of regulated digital assets using distributed ledger technology.”&nbsp;



Participating banks include Wells Fargo, BNY Mellon, Citi, HSBC and Mastercard, among others. Global financial messaging service provider Swift collaborated on the project to support “interoperability across the international financial ecosystem,” the NY Fed added. The network is a centralized solution, as opposed to blockchains such as Bitcoin and Ethereum.&nbsp;



“RLN was demonstrated as a potential design for a global instant dollar payment system,” Tony McLaughlin, head of emerging payments and business development at Citi Treasury and Trade Solutions, said during a <a href="https://www.rlnuspoc.org/home#subpage/introduction/section/s4jl3">webcast</a> Thursday to discuss findings of the experiment.&nbsp;



“The ability to move dollars in any amount on a 24/7 basis would be a game changer for global users of the dollar, augmenting the preferred international currency and full compliance with all rules and regulations with no corners cut,” McLaughlin added.&nbsp;&nbsp;



The NY Fed’s Innovation Center <a href="https://setl.io/setl-supports-members-of-the-u-s-banking-community-in-proof-of-concept-for-a-regulated-digital-asset-settlement-platform/">announced</a> the experiment in November 2022.&nbsp;



The current mechanism design does “not enable the interoperable transfer and settlement of digital assets between regulated financial institutions,” the NY Fed said.&nbsp;



The experiment’s successful conclusion comes after a group of private institutions announced the <a href="https://blockworks.co/news/goldman-sachs-blockchain-canton">launch of their own blockchain network</a>.&nbsp;



Goldman Sachs, Deloitte and Microsoft collaborated on the Canton Network, an open blockchain network designed to link apps built on Daml, a smart contract language created by startup Digital Asset, which is also a Canton collaborator. Participants said in May that Canton Network would begin testing in July.&nbsp;



The NY Fed said it has not yet established any plans to expand its RLN network or continue development.&nbsp;



“The NYIC has not committed to any future phases of work connected to this proof of concept,” the statement read. “The findings highlight areas for further research and analysis on potential enhancements to critical payment infrastructures supporting the functioning of the global economy.”



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NY Fed, big banks report success with centralized blockchain payments

Sebastian Sinclair

<div id="highlights-block_6201cae745c86" class="highlights">
 <ul>
 <li>Stablecoins, whose value is either fully backed by safe assets or not, could tie up liquidity in other areas of the traditional financial sector, according to a group of NY Fed economists and analysts</li>
 <li>The group is advocating for tokenized deposits hosted on DLT systems that would represent a claim on the depositor’s commercial bank instead</li>
 </ul>
 
</div>



A group of analysts and economists from the Federal Reserve Bank of New York said Monday stablecoins were &#8220;unlikely&#8221; to become the future of payments despite their rapid rise in recent years.



In a Liberty Street Economics <a href="https://libertystreeteconomics.newyorkfed.org/2022/02/the-future-of-payments-is-not-stablecoins/" target="_blank" rel="noreferrer noopener">column</a>, published on the Fed&#8217;s blog, the group said that while stablecoins were designed to be a better form of money than other cryptocurrencies, like bitcoin, they may be a &#8220;double-edged sword.&#8221;



Stablecoins are cryptos whose values are pegged to particular commodities like gold or fiat currencies, such as the US dollar and euro.



Specifically, the group, which included former NY Fed Vice President Rod Garratt and Fed economists Antoine Martin and Michael Lee, said stablecoins that are backed 100% by &#8220;perfectly safe&#8221; assets could tie up liquidity in other areas of banking.



Stablecoins that were not backed and did not tie up liquidity resembled <a href="https://www.cato.org/blog/how-us-government-paper-currency-began-how-private-banknotes-ended" target="_blank" rel="noreferrer noopener">private banknotes</a> from bygone eras, resulting in a &#8220;risky and less fungible&#8221; product.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;These types of private monies were subject to various problems, notably because issuers and the&nbsp;assets backing them were of uncertain and divergent quality,&#8221; the group said.</blockquote>



Instead, the NY Fed is advocating for tokenized deposits rather than stablecoin circulation.



&#8220;Bank depositors would be able to convert their deposits into and out of digital assets — the tokenized deposits — that can circulate on a [distributed ledger technology] platform.&#8221; The tokenized deposits would represent a claim on the depositor’s commercial bank, much in the same way a regular deposit does, the group said.



Their stance comes as no surprise, given their institution&#8217;s history of taking a hardline approach to crypto regulation alongside recent stablecoin growth, from $5.7 billion in December 2019 to $155.6 billion in January 2022.



Indeed, stablecoins have begun to disrupt the remittance and cross-border payments sectors across multiple economies. They are also <a href="https://cms.blockworks.co/most-fed-officials-say-inflation-goal-met-tapering-to-start-this-year/" target="_blank" rel="noreferrer noopener">considered a threat</a> to the US&#8217; economy and financial stability, among <a href="https://cms.blockworks.co/thai-regulators-to-clamp-down-on-crypto-payments-for-goods-and-services/" target="_blank" rel="noreferrer noopener">other nations</a>. Last year, US Federal agencies called on Congress to allow them to regulate stablecoin issuers in the same way they regulate banks.



The group&#8217;s column comes a day ahead of a US House of Representatives Financial Services Committee hearing titled “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins.”



The hearing will center on the swift growth of pegged cryptos while discussing findings from the <a href="https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf" target="_blank" rel="noreferrer noopener">report</a> by the president’s working group, which determined in November that stablecoins pose legal, regulatory and oversight challenges.



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<h3 class="wp-block-heading">Live at 10 am ET</h3>



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Stablecoins Are Not the ‘Future of Payments’, Say NY Fed Economists

<div id="highlights-block_61aa869c9b5c3" class="highlights">
 <ul>
 <li>The New York Federal Reserve has created an innovation center that will look into FinTech and CBDCs </li>
 <li>A report from the NY Fed and other economists suggests that a CBDC may improve consumer privacy and financial access </li>
 </ul>
 
</div>



The Federal Reserve Bank of New York is looking into how disruptive technologies like a central bank digital currency (CBDC) will impact the current financial landscape. 



The district bank has created the New York Innovation Center (NYIC) in partnership with the Bank for International Settlements (BIS) Innovation Hub. The center will work to “design, build, and launch new financial technology products and services for the central bank community,” potentially including CBDCs, the NY Fed announced in a <a href="https://www.newyorkfed.org/newsevents/news/aboutthefed/2021/20211129" target="_blank" rel="noreferrer noopener">statement</a> Monday. 



“The Federal Reserve and other central banks have a much wider perspective on the role disruptive technologies might play in the global financial system than just CBDCs and virtual currencies,” Nicholas Colas, co-founder of Data Trek Research said, referring to the implications of the center.&nbsp;&nbsp;



The financial technology products the NYIC is considering include surveillance and regulatory technology that would incorporate artificial intelligence into how central banks monitor compliance and anti-money launching, Per von Zelowitz, director of the center, said. The center will also explore potential improvements to the current financial market infrastructure, including investigations into a CBDC, von Zelowitz added.



“The future of money, so this relates to all of the digital currency related work that we’ll focus on, we mentioned central bank digital currencies, this is a critical area of focus for us,” von Zelowitz said during the NYIC launch call Monday. “This area could also include work related to stablecoins and cryptocurrencies and other areas that might be relevant to us and the central bank community.”



<h3 class="wp-block-heading">Advancing financial inclusion</h3>



Following the announcement of the NYIC, staffers from the NY Fed and the BIS partnered with the MIT Media Lab on a <a href="https://libertystreeteconomics.newyorkfed.org/2021/12/why-central-bank-digital-currencies/" target="_blank" rel="noreferrer noopener">report</a> which explores the potential use cases for a CBDC. 



In the event that payment costs rise due to a lack of competition in the market, a CDBC may provide the opportunity for the central bank to step in and help consumers. CBDCs could also help advance financial inclusion, the report argues.&nbsp;



“Will the private sector provide payment arrangements that include unbanked populations? Private payment methods often do not cater to the unbanked,” the report reads. “For example, one survey finds that in most economies, fintech payment services are more widely adopted by those already using traditional financial institutions for similar services. A central bank may take a proactive approach to improving financial inclusion if the private sector, left alone, fails to offer universal access.”&nbsp;



The <a href="https://www.bis.org/publ/work931.htm" target="_blank" rel="noreferrer noopener">aforementioned survey</a>, conducted by the BIS, also cites a &#8220;fintech gender gap,” where in the US, 29% of men and 21% of women use ﬁntech products and services. Here, CBDCs could provide greater access to financial services and would not include the same discrepancies that currently exist in the fintech landscape, according to the report.



The report authors also argue that a CBDC will lead to enhanced consumer privacy because consumers today may be giving up too much of their personal data to private payments systems.&nbsp;



“As a non-commercial party, central banks have no incentive to gather transaction data and, thus, may be better able to internalize the social gains from facilitating privacy,” the report read.&nbsp;



<h3 class="wp-block-heading">Giving up personal data</h3>



Others, however, argue that CBDCs would give officials a too intimate look into consumers’ lives. Governments would be granted far more power and oversight over how citizens spend money and manage their finances, Anne Richards, CEO of Fidelity International, said.&nbsp;



“Programmable money is a really profound change that might make all sorts of things dramatically more frictionless than they are today,” Richards said during a panel discussion at the Blockworks Digital Asset Summit in London in November. “On the other hand, there are some real challenges about what that means for how much personal freedom, how much personal information actually, potentially, are you giving up to the provider of that central currency.”&nbsp;



The report also notes that the current regulatory framework around financial technology should be improved in order to promote innovation.&nbsp;



“The public sector could take actions to improve competition and efficiency in payment services (which lie squarely in the mandate of many central banks) to counteract the high cost of payments,” the report read. “They could also broaden access to digital central bank money, letting new entrants build payment services on their credit-risk-free payment infrastructure.”&nbsp;



Experts are still largely skeptical about what a CBDC may even accomplish in a world where digital payments, online banking and now stablecoins are the norm.&nbsp;



“The dollar is the world’s reserve currency. Nothing the Fed does while it embraces disruptive innovation can undermine that status,” said Data Trek Research’s Colas. “Also, it knows that parts of the virtual currency world – stablecoins – are already embracing the dollar as the global gold standard for online payments and wealth preservation. While we do expect the Fed to move forward on CBDCs in 2022, it is logical to think progress will be slow.” 



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