The way we process international transactions is changing rapidly. A recent report jointly released by the Federal Reserve of New York (Fed) and the Monetary Authority of Singapore (MAS) demonstrated a game-changing potential of central bank digital currencies (CBDCs). The study was published as part of Project Cedar and Project Ubin, two projects overseen by the Fed and MAS.
The Rise of CBDCs: A Solution for Cross-Border Payments?
For several years now, global attention has focused on CBDCs. For those who don’t know, these are digital versions fiat currencies. Although dangerous for privacy, CBDCs have the potential to reduce costs and speed financial transactions. However, an important question remains: can these systems interact with each other to facilitate cross-border payments?
THE joint report of the Fed and the MAS answers this question with optimism. The researchers succeeded in carrying out cross-border transactions using two innovative technologies. More precisely blockchain and the HTLC (hashed timelock contracts).
The results were not disappointing. Indeed, the various tests resulted in the finalization of transactions in real time. Such an evolution is not possible with traditional systems like SWIFT. With recent developments, it is possible that CBDCs could remove current barriers to cross-border transactions.
Promising tests reveal the potential of digital currencies
The researchers used eight separate scenarios to test their hypothesis about CBDC interoperability. They also simulated hypothetical payments to assess the possibility of near-instantaneous transactions.
Their conclusion is final. Through the use of HTLCs, it is possible to establish interoperability between registries with different technical designs. Thus, CBDCs can facilitate multi-currency transactions.
But also, the speed of transactions has been impressive. Settlement was made at an average of 6.5 transactions per second, peaking at 47 transactions per second. These payments, made end-to-end, made it possible to achieve an average payment latency of less than 30 seconds.
It is important to note that this research focuses on the technical challenges of implementing CBDCs and does not necessarily imply a decision to adopt CBDCs or underlying technologies in particular. However, it illuminates the significant potential of CBDCs to transform the landscape of cross-border payments.
The efforts of the New York Fed and the MAS highlight the importance of digital innovation in finance. They demonstrated that CBDCs could not only facilitate payment flows more efficient cross-border transactions, including for less liquid currencies, but also play a crucial role in multi-currency transactions.
In addition, it is important to remain attentive to the risks associated with CBDCs. They have the potential to revolutionize finance thanks to the blockchain, but also, it is possible that dictatorships use them to enslave populations, as is already the case in China.
Receive a digest of news in the world of cryptocurrencies by subscribing to our new service ofdaily and weekly so you don’t miss any of the essential Tremplin.io!