Yesterday Federal Reserve Governor Waller confirmed that the US would continue to participate in Project Agorá, a cross border payment initiative involving the BIS, seven central banks and 41 institutions. It aims to make correspondent banking faster and cheaper using tokenization. While most of the central banks will be providing a wholesale CBDC, the United States will potentially allow some existing central bank reserves to be tokenized. The New York Innovation Center at the New York Fed is a participant in the project on an exploratory basis.
Stepping back, President Trump’s executive order to end work on a central bank digital currency (CBDC), was not a surprise. However, the instruction failed to clarify whether the Federal Reserve could continue working on a wholesale CBDC for interbank payments. That would not have the same privacy issues as a retail CBDC. Arguably, a wholesale CBDC is only a minor extension of the central bank’s existing role.
From a legal perspective, there are two ways a central bank can adopt tokenization. One is to legally create a new central bank liability, a wholesale CBDC. The other is to treat all central bank reserves as one liability, but allow some of them to be tokenized. Eighteen months ago, the Federal Reserve published a paper exploring this point. It distinguished between the payment rail and the settlement asset: a wholesale CBDC or a tokenized reserve. Tokenized reserves represent the same settlement asset but using a different payment rail – DLT.
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