The New York Federal Reserve along with financial institutions including Citibank, HSBC, Wells Fargo and Mastercard ran a 12-week pilot to test the feasibility of settling payments through a digital dollar on a distributed ledger system, finding that a digital dollar can make cross border payments available faster and around the clock.

The Fed’s New York Innovation Center tested the Regulated Liability Network (RLN), which allows banks to simulate issuing digital money representing their customers’ own funds before settling through central bank reserves on a distributed ledger, Tony McLaughlin, emerging payments and business development at Citi Treasury & Trade Solutions, said during the Regulated Liability Network U.S. Proof of Concept webinar held last week. 

The proof of concept (PoC) of RLN, which started in November 2022, showed the participating FIs — including Citibank, HSBC, BNY Mellon and U.S. Bank — that digital dollars can improve wholesale payments domestically and for cross-border payments without altering the legal treatment of the deposits, Per Von Zelowitz, director of New York Innovation Center at NY Fed, said during the webinar.  

In traditional payments systems, messages flow between banks and the central bank that provides settlements services, McLaughlin said. Each bank operates its own data centers and processes transactions once information is received by its own data center, he added.  

With the advent of blockchain technology, information can be stored in the shared payment networks of banks, making transactions faster, McLaughlin said. 

“The ‘tokenization thesis’ holds the intriguing possibility to process financial transactions on a 24/7, multi-asset, programmable infrastructure,” McLaughlin told Bank Automation News. “The prospect of a global, instant U.S. dollar payment system that could benefit cross-border settlements merits further serious study.” 

Cross-border payments 

Consider a company in Germany, for example, that buys an industrial robot in Japan and settles the transaction in U.S. dollars. If the transaction occurs during a weekend or holiday, the Japanese company must wait for payment, McLaughlin said. 

“People still want to make payments on U.S. bank holidays and on weekends,” he said. “The ability to move dollars in any amount, 24/7 would be a game changer for the global users of the U.S. dollar, augmenting the preferred international currency and in full compliance with rules and regulations.” 

The RLN will provide faster cross-border payments with no corners cut in terms of anti-money laundering, know-your-customer and sanctions. Instant, compliant, cross-border payments can ensure that “it is the dollar that remains the international currency of choice for the digital age,” McLaughlin said. 

Nearly 96% of global trade transactions between 1999-2019 were in U.S. dollars, according to the U.S. Federal Reserve. The public-private partnership for the proof of concept of RLN technology “demonstrated the possibility to construct a compliant global instant payment system,” McLaughlin said. 

Technical feasibility 

The RLN was able to demonstrate 24/7 payment options, settlements in “multiple instruments in real time,” along with showcasing interoperability, Raj Dhamodharan, head of crypto and blockchain at Mastercard, said during the webinar.  

“We live in a world of different networks and it’s not going to change tomorrow,” Dhamodharan said. “Having interoperability among different networks like ISO 20022 is important … and the PoC can start to provide that kind of connectivity to back-office systems and traditional payment systems.” 

Despite working on a shared– ledger technology, RLN can provide point-to-point private transactions. The technical work stream of the PoC concluded that the shared ledger is a “valid candidate technology for implementation that could power the next cycle of innovation,” Dhamodharan said.