This first of many pilots will facilitate dry runs for atomic settlements, real-time delivery-vs-payment, and other associated digital settlement/clearing intricacies.
As markets evolve and become more digitalized, the use of printed US currency continues to decline, being replaced by tokenized securities at a rapid pace. The US government is studying the risks and benefits of a Central Bank Digital Currency (CBDC), which, unlike private cryptocurrencies such as bitcoin, would be issued and backed by the Federal Reserve, just like physical currency.
To measure the benefits of a CBDC and its associated clearing and settlement processes, a prototype known as Project Lithium has been developed using distributed ledger technology (DLT or blockchain). The prototype can be used to explore how a CBDC could enable atomic settlement, a conditional settlement that occurs if delivery and payment are both received at the same time.
The pilot can also be used to demonstrate the direct, bilateral settlement of cash tokens between participants in real-time delivery-versus-payment (DVP) settlement. Additionally, Project Lithium can help its developers to realize the potential benefits of a CBDC, including:
- Reduced counterparty risk and trapped liquidity
- Increased capital efficiency
- A more efficient, automated workflow
- The guarantee that cash and securities are delivered
- Added transparency to regulators
According to Jennifer Peve, Managing Director, Head of Strategy and Business Development, DTCC, which has partnered non-profit The Digital Dollar Project (DDP) to develop the pilot: “Project Lithium represents the next major step in our exploration of DLT, tokenization and other emerging technologies, (and will) lay the groundwork for the financial community to better evaluate the implications of a CBDC across the trade lifecycle, as interest in this style of funding continues to grow.”
Said J. Christopher Giancarlo, co-founder and Executive Chairman, DDP: “A CBDC could improve time and cost efficiencies, provide broader accessibility to central bank money and payments, and all while emulating the features of physical cash in an increasingly digital world.”