Despite Crypto Woes, New York Fed Teams With Big Banks To Test Digital Dollar

The Federal Reserve Bank of New York is leading a new project that aims to test whether digital tokens representing the U.S. dollar can actually bring any positive changes to the existing banking pipeline. The New York Innovation Center announced earlier today that the project involves renowned names in the industry such as Mastercard, Citi, HSBC, Wells Fargo, U.S. Bank, and BNY Mellon, among others. Slated to last for 12 weeks, the pilot test is a proof-of-concept experiment that will be centered around a Regulated Liability Network (RLN). To put it simply, the RLN is a form of financial infrastructure that will allow transactions across partner banks using a distributed ledger system.

The idea is to create an always-on and scalable infrastructure that facilitates the movement of funds over a shared ledger system between all the banks, something that is inspired by the blockchain-based verification system for saving and authenticating crypto transactions. The test will strictly involve simulated data in a test environment but will use denominations passing off as the U.S. dollar. The NY Fed's announcement comes at a rather interesting time when trust in the crypto segment is at an all-time low. The industry continues to bleed hundreds of billions of dollars, putting users at great financial peril in the hands of disgraced corporations like FTX.

A step toward practical adoption

The objective of the Regulated Liability Network U.S. Pilot is to check if the distributed ledger system is actually practical and can be implemented at scale to solve modern-day banking-related issues. The stakeholders involved in the pilot will collectively contribute toward setting up the technical and functional infrastructure of the digital dollar concept and will use those learnings for potentially building a user-facing system in the near future.

Findings of the experiment will be released once it's over and, based on the reception, the RLN will be floated for future tests and bringing it into the mainstream. According to Bloomberg, distributed ledger system dealing with U.S. dollar tokens will make cross-border cash transfers significantly easier. 

Accenture is also exploring digital dollar opportunities with its Digital Dollar Project, which proposes using a digital, tokenized version of U.S. currency to make the existing financial infrastructure faster and more affordable. In September, the White House also proposed the usage of a United States central bank digital currency (CBDC) and has already commissioned research and development into a segment that is deemed central to the country's role in the international financial system.