US Federal Reserve Begins Testing the Digital Dollar with Key Global Banks

Citigroup, HSBC, Mastercard, and Wells Fargo are among several financial institutions joining a 12-week digital dollar pilot with the United States Federal Reserve.

The pilot will test how banks, using digital dollar tokens in a common database, can help speed up payments. The project will run on a proof of concept platform called the regulated liability Network (RLN) where tests will be conducted in a test environment and use simulated data, the New York Fed has said.

The US Fed is spearheading the project through New York Innovation Center (NYIC) with the following institutions participating:

• BNY Mellon
• Citi
• HSBC
• Mastercard
• PNC Bank
• TD Bank
• Truist
• U.S. Bank
• Wells Fargo

The news prompted a reaction from whistleblower, Edward Snowden:

According to the project participants, the proposed platform would create innovation opportunities to improve financial settlements, and would include participation from:

• Central banks
• Commercial banks of various sizes, and
• Regulated non-banks

The pilot will test a version of the RLN design that operates exclusively in U.S. dollars where commercial banks issue simulated digital money or tokens – representing the deposits of their own customers – and settle through simulated central bank reserves on a shared multi-entity distributed ledger.

The pilot will also test the feasibility of a programmable digital money design that is potentially extensible to other digital assets as well as the viability of the proposed system within existing laws and regulations.

Other key aspects of the pilot as listed by participants include:

• Regulatory framework – The platform will align with the existing regulatory framework and preserve existing requirements for deposit-based payments processing, notably maintaining know your customer and anti-money laundering requirements
• Scope – The PoC will simulate digital money issued by regulated institutions in U.S. dollars, although the concept could potentially be extended to multi-currency operations and regulated stablecoins
• Tokens – The PoC will simulate tokens that are 100% fungible and redeemable with other forms of money
• Industry Collaboration – The PoC will include dialogue with the broader U.S. banking community, including community and regional banks

The group says that they will publicize the results when done, which they hope will be an important contribution to the literature on digital money.

In terms of future plans, the banking group participants are not committed to any future phases of work once the pilot has been completed.