Major clearing house tests how to settle a CBDC

A major clearing house is working on a prototype to explore how a central bank digital currency could be settled if adopted, as the Federal Reserve and Biden administration explore the pros and cons of a CBDC.

The Depository Trust & Clearing Corporation, which clears and settles trades for stocks and bonds, is teaming up with the Digital Dollar Project, a nonprofit led by former U.S. regulators, to test the design of a CBDC and settling delivery and payment at the same time in a project dubbed Project Lithium.

One of the keys to a central bank digital currency is that it’s instantaneous and settled immediately. Project Lithium is looking at using distributed ledger technology to create the best design that allows the most efficient instantaneous settlement.

“A CBDC could improve time and cost efficiencies, provide broader accessibility to central bank money and payments, and all while emulating the features of physical cash in an increasingly digital world,” said Christopher Giancarlo, co-founder and executive chairman of The Digital Dollar Project and former chairman of the Commodities Futures Trading Commission.

Digital currency USA dollar sign on abstract HUD technology background. Futuristic hi-tech digital money.Electronic economy

Digital currency USA dollar sign on abstract HUD technology background. Futuristic hi-tech digital money.Electronic economy

The use of printed U.S. currency is on the decline as markets become more digitized and securities are tokenized. Unlike private cryptocurrencies like bitcoin, a CBDC would be issued and backed by the Federal Reserve, just like U.S. paper dollars and coins.

The pilot will also look into how it can use DTCC’s clearing and settlement capabilities to realize the potential benefits of a CBDC, including improving capital efficiency, lowering counter-party risk, transparency for regulators, and guaranteeing cash and securities are delivered to the proper parties.

This comes as the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative have come up with an initial design for a central bank digital currency. The theoretical coin, which was unveiled as the Federal Reserve explores the pros and cons of adopting one, could handle 1.7 million transactions per second, and settle in under two seconds, the Boston Fed and MIT estimated.

The Federal Reserve hasn’t made a decision on whether to adopt a CBDC yet. But Treasury Secretary Janet Yellen said a CBDC could help create a more efficient payment system and could become a form of trusted money comparable to physical cash. She says she’s not sure what conclusions the administration will reach, but that issuing a CBDC would present a “major design and engineering challenge that would require years of development — not months.”

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Jennifer Schonberger covers cryptocurrencies and policy for Yahoo Finance. She has been a financial journalist for over 14 years covering markets, the economy and investing. Follow her at @Jenniferisms.

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