To illustrate cross-border payments using illiquid currencies and an intermediary “vehicle” currency, the researchers expanded on their own studies.
The New York Innovation Center (NYIC) of the Federal Reserve Bank of New York and the Monetary Authority of Singapore (MAS) have published the findings of their joint initiative, “Project Cedar Phase II x Ubin+,” in an effort to transform wholesale cross-border payments. The project’s goal was to evaluate the viability and advantages of using central bank digital currencies (CBDCs) to facilitate safe and effective international trade.
The idea of vehicle currencies, which serve as highly liquid intermediates for trading less liquid currencies, was a key emphasis of the project. The process of cross-border transactions is simplified, and liquidity is increased, by changing the first low-liquidity currency into a vehicle currency and then translating it into the second low-liquidity currency.
Unlocking the Potential of CBDCs: Transforming Cross-Border Payments
The Project Cedar Phase II x Ubin+ findings offer insight into the CBDCs’ transformational possibilities in cross-border payments. The initiative demonstrates the potential to increase efficiency, save costs, and assure secure cross-border transactions by utilizing the advantages of vehicle currencies and utilizing the capabilities of digital currencies issued by central banks. The partnership between NYIC and MAS provides up opportunities for additional research and CBDC development in transforming the world of finance.
MAS deputy managing director Leong Sing Chiong said in a statement:
“The Cedar x Ubin+ experiment envisages a future digital currency landscape where central banks can enable interoperability of wholesale CBDCs to facilitate more efficient cross-border payment flows including for less liquid currencies, without requiring a common infrastructure.”
Leveraging Hashed Timelock Contracts
The project chose to use hashed timelock smart contracts to connect various distributed ledger systems, enabling simulated cross-border, cross-currency payments. These contracts, combined with an off-chain messaging channel, enhance efficiency and interoperability. Furthermore, this solution is not restricted to blockchain systems and can be used in non-blockchain environments.