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NY Fed official: Digital dollar could speed foreign exchange settlement

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A top Federal Reserve Bank of New York official said on Friday that the bank sees promise in using a central bank digital dollar to speed up settlement time in foreign exchange markets.

Michelle Neal, who is head of the bank’s Markets Group, did not say anything involving a central bank digital currency, or CBDC, was imminent. But she explained that research efforts at the bank identified how this type of money could benefit a key part of the financial system.

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Foreign exchange spot transactions “are critical in the context of cross-border payments, and serve as a building block for longer, more complex transactions,” Neal said in the text of remarks prepared for a conference in Singapore. She noted that settlement of these trades takes about two days, “which leaves some room for improvement.”

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According to the research effort, a Fed digital dollar, used in a wholesale capacity, and the technology to record transactions “results in instant and atomic settlement.”

Neal said the research work “indicated that settlement could occur in fewer than 10 seconds on average and that horizontal scaling was possible.”

The Fed has been exploring for some time how it can launch a fully digital dollar that some have referred to as Fedcoin. Fed leaders have said that any launch of such an asset would need the support of elected leaders.

Some central bankers have questioned whether a CBDC for the United States is even needed at all.

Neal’s comments came before the release of a report from the New York Fed on the research project.

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In that release, Per von Zelowitz, director of the bank’s New York Innovation Center, said the first phase of work “revealed promising applications of blockchain technology in modernizing critical payments infrastructure, and our inaugural experiment provides a strategic launch pad for further research and development regarding the future of money and payments from the U.S. perspective.”

The report cautioned that its findings did not have implications for the adoption of a fully digital central bank currency and are “not intended to advance any specific policy outcome.” (Reporting by Michael S. Derby; Editing by Kim Coghill and Andrea Ricci)

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