Banks, investors need to plan as Fed’s digital dollar pilot launches

The Federal Reserve Bank of New York has started a 12-week proof of concept project with several large banks to study the feasibility of using distributed ledger technology to manage a digital dollar. The so-called “regulated liability network” pilot will be conducted in a test environment and use simulated data. The pilot will test how banks using digital dollar tokens in a common database can speed up payments. Participating banks include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo.

In some respects, the Fed is trying to keep up with China and India. China has been testing a central bank digital currency since April 2020; the digital yuan was an accepted currency in the Olympic Village in Beijing at the Winter Olympics this year. India launched a virtual rupee on Dec. 1. Also, India has indicated that cryptocurrency regulation would be a priority when it hosts the G-20 summit in 2023.

So, three billion people out of a total world population of 8 billion – many of them currently considered to be “unbanked” – will soon be able to use a virtual currency. Business transactions using a virtual currency hope to clear transactions faster, which could dramatically change the pace at which business happens.

Two sectors that will be taking particular interest in the Fed pilot are the banking industry and venture capital/private equity.