A month-long test with some of the world's largest banks has revealed that the digital dollar can be an effective way to improve domestic and cross-border payments, according to a unit of the New York Fed.
The Fed's Center for Innovation in New York has spent 12 weeks testing a technology known as a regulated liability network, which allows banks to simulate the issuance of digital currencies representing their customers' own funds on a blockchain before making payments through central bank reserves.
The test proved to the Fed that these so-called digital dollars have the ability to improve wholesale payments and that the use of digital distributed ledgers does not change the legal status of deposits.
The test was conducted on a private blockchain that requires permission to participate, rather than the public blockchains commonly seen in the cryptocurrency world.
“From a central banking perspective, the proof of concept helped explore tokenized regulated deposits and understand the potential functional benefits of central bank and commercial bank digital money working together on a common ledger,” Per von Zelowitz, Director of the New York Center for Innovation, said in a statement.
Citigroup Inc. and Wells Fargo & Co. Some of the world's largest banks, including the United States, joined the Fed's test to see if the new system could solve problems such as the cross-border movement of cash.
*Not investment advice