July 07, 2023

NY Fed publishes report on digital assets payments system

digital dollarThe Federal Reserve Bank of New York’s New York Innovation Center Thursday published a report on the feasibility of an interoperable network for wholesale payments operating on a shared multi-entity distributed ledger.

The project experimented with the concept of a regulated liability network (RLN) and was conducted in collaboration with members of the financial services sector, including banks and payments processors such as Mastercard, Wells Fargo, Citi, and others.

The proof of concept (PoC) looked at the technical feasibility, business applicability, and legal viability of using shared ledger technology to settle the liabilities of regulated financial institutions using tokenized deposits issued by commercial banks and wholesale central bank digital currency (wCBDC) as a settlement asset.

A report investigating the legal feasibility of the RLN infrastructure noted that “the public would have no ability to acquire or transact in the deposit tokens except through a deposit relationship with a bank and a wallet hosted by that bank.” The report stated that additional analysis and engagement with federal regulators would be required before final conclusions could be reached; however, the press release noted that “the legal workstream did not identify any insuperable legal impediments under existing U.S. legal frameworks that would prevent the establishment of an RLN system as contemplated in the PoC.”

The report also included a disclaimer that the PoC “is not intended to advance any specific policy outcomes, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a central bank digital currency.”

While testifying before Congress last month, Federal Reserve Chair Jerome Powell indicated the Fed is not currently in support of a CBDC, and if the Fed were to change its stance, he believes it would not be distributed through the Fed alone.

NAFCU opposes the development of a CBDC that is offered as a substitute for credit union or bank deposits, arguing credit unions represent a superior and safer alternative for advancing financial inclusion goals and promoting affordable access to payments. While the RLN is distinguishable from the type of intermediated CBDC described in the Federal Reserve’s 2022 consultative paper, there remain unanswered questions as to what financial institutions would be able to participate through the RLN and how they would be supervised.

NAFCU discussed the new report with credit unions during its second quarter Digital Assets Working Group meeting Thursday. The working group also reviewed the Securities Exchange Commission’s (SEC) recent charges against Binance and Coinbase, guidance from the Commodity Futures Trading Commission (CFTC) related to Derivatives Clearing Organizations (DCOs) and a risk management program for merchants, and potential digital assets legislation.