Digital Dollar Projectand DTCC: Security
Settlement Pilot
Exploring Post-Trade Security Settlementwith a U.S. Central Bank Digital Currency
November 2022

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Pilot Partners

Pilot participants provided feedback in the DDP and DTCC:
Security Settlement Pilot through a series of workshops

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Publication date: November 2022
© 2022 DTCC. All rights reserved.

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ForewordIt’s often said that the COVID-19 pandemic condensed a decade of digital innovation into a two-year period – astatement that rings truer every day. In the post-COVID world, the pace of change has further accelerated, andthe reality is that we should expect digital transformation to reshape markets and market structure in the
coming years.
At the Depository Trust & Clearing Corporation (DTCC), we have a long history of driving digital innovation –beginning with our founding and the creation of the first electronic securities nearly a half-century ago. We’ve
built upon this legacy in each successive decade, and today, our commitment to providing industry leadershipon ways to leverage innovative and emerging technologies to make markets safer, more efficient and lesscostly is stronger than ever before. This is apparent in our research, development and launch of new solutions
in recent years that use distributed ledger technology (DLT), artificial intelligence and machine learning, cloudcomputing and other technologies.
One area of experimentation that has generated significant interest is our work with Digital Dollar Project thisyear to better understand the implications of a U.S. Central Bank Digital Currency (CBDC) on post-trade
settlement. These efforts, which are detailed in this white paper, simulate future settlement functionalities
while ensuring optionality for clients as well as the same – or higher – levels of safety and security as DTCC’s
existing settlement solutions. This new initiative represents the essence of innovation.
I wish to thank our partner, Digital Dollar Project (DDP). The collaboration with DDP enabled a successful pilot
and provided us with valuable insights. DDP and DTCC will continue our exploration of this technology tosupport efforts by the public sector and the industry to examine the benefits and challenges of a wholesale
U.S. CBDC.

Jennifer Peve
DTCC Managing Director
Head of Strategy and Business Development

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Foreword

The Digital Dollar Project is a non-profit organization devoted to catalyzing research and exploration of thepotential advantages and challenges of a U.S. CBDC. It works to convene and incorporate the perspectives of
a diverse set of stakeholders, including private sector, academic, and policy thought leaders, to better inform
national policy considerations in the development of a U.S. digital dollar. In 2021, the DDP launched a series of
exploratory pilot programs to educate the public, market participants, and policymakers on the implications ofapplying a CBDC to a range of real-world use cases.
DDP and DTCC’s Security Settlement Pilot (the pilot), the first private sector-initiated experiment intended to
inform a potential U.S. CBDC, is a prime example of how DDP works with industry stakeholders to bring abroad range of viewpoints to the exploration of a digital dollar. As outlined in this report, the pilot tests theability of a simulated digital dollar, transacted on a DLT-based network, to underpin the settlement of U.S.
equity securities. It confirms how a robust, secure and efficient securities settlement process working with apotential U.S. CBDC could provide many benefits to safeguard U.S. financial stability and mitigate operationaland counterparty risks. Understanding the impact of CBDC technology on this critical aspect of financial
market infrastructure is imperative to the evolution of U.S. markets.
DDP believes that conducting pilot projects of CBDC applications under real-world conditions with industry
participants best generates the empirical data necessary to adequately inform the design and potential
deployment of CBDC. It is through public-private partnerships that we can most effectively explore andunderstand the many technical and policy dependencies and implications in the design of a CBDC.
DDP wishes to thank DTCC for their pilot leadership and the pilot participants for their outstanding
collaboration and offer this report for public review and analysis as a resource to inform this critical public
policy discussion.

The Digital Dollar Project Board of Directors

The Honorable J. Christopher Giancarlo
Executive Chairman

Jennifer B. Lassiter
Executive Director

Daniel GorfineDavid TreatCharles Giancarlo6 | DIGITAL DOLLAR PROJECT + DTCC

Table of Contents
Foreword: DTCC ...................................................................................................................... 4
Foreword: DDP ........................................................................................................................ 5
Executive Summary ................................................................................................................ 7
Terminology ............................................................................................................................... 11
Introduction ............................................................................................................................... 13
The Pilot Experiment ................................................................................................................. 15
Scope, Objectives, and Approach ............................................................................................ 15
Operational and Business Requirements ................................................................................ 17
Achieving Network Connectivity and Settlement Assurance ................................................. 20
Pilot Findings ............................................................................................................................. 23
Design Decisions and Conclusions .......................................................................................... 23
Business Opportunities and Tradeoffs Identified from CBDC Settlement ............................ 28
Refining the DDP Champion Model ......................................................................................... 31
Future Exploration ..................................................................................................................... 33
Conclusion ................................................................................................................................. 35
Appendix .................................................................................................................................... 36
Post Trade Settlement Introduction ........................................................................................ 36
The Role of DTCC ...................................................................................................................... 36
DTCC’s Digital Settlement Network ......................................................................................... 36
DTCC’s Current Cash Settlement Model ................................................................................. 37
The Pilot’s Simulated CBDC Network ...................................................................................... 38
CBDC Overview ......................................................................................................................... 38
Digital Dollar Project’s Champion Model ................................................................................. 38
Using CBDC for U.S. Post-Trade Settlement ........................................................................... 40
References ................................................................................................................................. 41

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Executive Summary
Exploring Post-Trade Security Settlement with a
U.S. Central Bank Digital Currency
Capital market infrastructure providers around the world are looking to new technologies tomodernize legacy systems and provide the industry access to new offerings. Market participants arelooking for solutions to simplify compliance requirements and ease rising capital allocations andliquidity costs. There is evidence that DLT based infrastructures could save the industry billions ofdollars a year by simplifying trade confirmations, reconciliation, cash management, asset
optimization and other exceptions-based business logic processes[1]. In addition, CBDC could offer
a new and alternative payment model that may provide benefits to cash settlement processes in the
United States. To further understand the promise and implication of CBDC, DTCC and DDP launcheda pilot initiative focused on delivery versus payment (DvP) settlement.
Given the global activity surrounding the potential of CBDC development, the pilot set out to explore
CBDC in a U.S. market context and to better understand the potential implications of using CBDC in
the DvP settlement process. Post-trade settlement in the U.S. is significantly different fromsettlement in foreign markets and carries a distinct set of requirements. As digital assets andcurrencies based on DLT become broadly adopted, it is important for U.S. market participants to
explore this technology and understand its implications. Building on the work of global initiatives,
this pilot explored CBDC in a distinct U.S. financial market setting.
Leveraging DTCC’s experience with and investment in DLT, the pilot focused on exploring theimplications of using a U.S. issued CBDC in DTCC’s post-trade services. DTCC and DDP
experimented with CBDC technology in a research development environment without production
implications. The team designed and developed a CBDC network that builds upon the work ofprevious initiatives coordinated by a range of market participants, including private sector players
and central banks, which explored the use of a CBDC in wholesale securities settlements. In the pilot
the team designed and implemented a technology solution to demonstrate secure and efficient useof settling tokenized securities on DTCC’s Digital Settlement Network prototype against tokenized
dollars on a simulated CBDC network, ultimately connecting two distinct asset networks to enablesecure, resilient, and efficient security settlement with CBDC. Further, the team assessed network[1] Accenture, “Banking on Blockchain, A Value Analysis For Investment Banks”

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governance and created a mechanism for a network administrator to resolve transactional issues if
needed but would otherwise observe while the network automated orchestration. The pilot also
solicited feedback from a group of industry experts across nine participating banks to validate thetechnical and functional designs of the pilot and to evaluate the business implications for wholesale
securities settlement.[2] The pilot enhanced the DDP’s understanding of CBDC, outlined network
connectivity and design choices, identified potential business outcomes, and laid out potential
opportunities for further exploration of a CBDC settlement use case.

DTCC’s Digital Settlement Network

Digital Dollar Network

DTCC“FederalReserve”

Settlement
Settlement
Manager

Participants(e.g., Broker
Dealers)

Instructions

Payment
ManagerBank[2] During the pilot, participants completed questionnaires to provide feedback on the project. The responses from the questionnaires
have been anonymized and used to inform the perspectives of this report.

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Key Outcomes
CBDC Design Approach: Refined the DDP's CBDC Champion Modelrequirements to support U.S. post-trade settlement.
A CBDC network's technology decisions and design choices should be driven byfunctional needs, and as such, multilateral settlement and asset encumbrance
mechanisms were identified as core functional requirements to support posttrade settlement.
Broader access to a digital Federal Reserve payments system could change theexisting settlement bank model as well as traditional industry responsibilities.
Therefore, the impacts of a potential decision by the Federal Reserve to offer a CBDC
should be explored in future initiatives.

Network Connectivity & Design Choices: Implemented certain design
considerations based on a logical architecture.
Minimized transaction confidentiality risks while providing sufficient transparency to
DTCC and the Federal Reserve in a simulated environment.
With the assumption that a Federal Reserve CBDC network and the DTCC’s Digital
Settlement Network would be separate and distinct networks, orchestration between
the two networks was required to provide the guarantee of atomic settlement.
Implemented a neutral third-party orchestrator to handle all settlement transaction
instructions between the networks which ensured that the assets were settled on both
networks, minimized dependencies on communication between parties and eliminatedcounterparty risk at the time of settlement.
Used an algorithmic encumbrance mechanism to enforce conditions on the release of
assets, which leveraged smart contracts to control the asset rather than a third party.

Business Implications: Found operational benefits and tradeoffs of apotential CBDC settlement system.
A CBDC could enhance operational efficiencies, allowing DTCC to streamline settlement
processes.

10 | DIGITAL DOLLAR PROJECT + DTCCA DLT-based cash settlement infrastructure where the Federal Reserve is theowner and operator of the network can provide transparency and reporting benefits
as an alternative model that replaces and simplifies reporting to DTCC and theFederal Reserve.
CBDC settlement supports a flexible settlement architecture that provides additional
optionality to industry participants.
CBDC settlement could provide funding and risk benefits and tradeoffs for the industry.

Future Considerations
Future Exploration: Specified opportunities for further exploration.
Potential business benefits to CBDC settlement will depend on industry adoption.
Accordingly, ecosystem adoption rates and requirements should be studied to better
understand the business value proposition.
The design and implementation of a logical model that could support cross-network
settlement was the focus for the pilot. Future experimentation should focus on refining
technology requirements for such a model, including scalability and performance,
network interoperability and standards, and participant integration.
As the U.S. dollar is an integral part of the U.S. and global economy, a digital dollar should be
carefully explored in consultation with key stakeholders in both the public and private sectors. Thispilot with DTCC was a practical exploration of the use of simulated CBDC and DLT for DvP
settlement in the U.S. wholesale financial markets through direct engagement with market
participants. The results of the pilot are intended to inform private sector participants and U.S.
policymakers of the advantages, requirements, and implications of this new technology paradigm.

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Terminology
An important foundational component of the pilot was using common
terminology and aligning on universally consistent definitions during theexperiment. This report uses the following terms and abbreviations forease and convenience.
Application Programming
Interface (API)A mechanism enabling communication between two software systems.

Atomic Settlement

The exchange of two assets that are conditional such that the transfer of one
occurs only upon transfer of the other one.

Bilateral Settlement

A transaction in which two firms settle trades directly with one another.

Central Bank Digital
Currency (CBDC)

A fiat currency that is digitally issued by the government’s central bank, has
the same legal status as physical bank notes and is fully fungible with central
bank notes (bank notes or cash) and reserves.

Central Securities
Depositories (CSD)

Provides a central location in which securities may be immobilized, or throughwhich securities may be dematerialized, and interests in those securities
reflected in accounts maintained for members.

Central Counterparty(CCP)

Also known as Central Counterparty Clearing House. A party that interposes
itself between the counterparties in financial transactions by acting as thebuyer to every seller and the seller to every buyer and provides clearing andsettlement services

Delivery vs Payment (DvP)

Delivery versus Payment (DvP) is a settlement method that guarantees thetransfer of assets only happens after payment has been made.

Distributed Ledger
Technology (DLT)Distributed Ledger Technology is a decentralized digital system for recordingtransactions between parties in multiple places at the same time.

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Encumbrance

An encumbrance on a DLT transaction, if present, enforces a conditional
control over the transaction that must be verified during the execution of thetransaction. Transactions are encumbered by smart contracts.

Fed Fund Settlement
System (FFS)The Fed Fund Settlement System manages the communication of cash
obligations to the Federal reserve system to update DTCC participant’s
reserve accounts.

Multilateral Settlement

Multilateral settlement is a payment model where the transactions ofmultiple parties can be summed and settled in aggregate rather thansettled individually.

National Settlement
Service (NSS)The National Settlement Service is a multilateral settlement service owned andoperated by the Federal Reserve Banks. The service is offered to depository
institutions that settle for participants in clearinghouses, financial exchanges
and other clearing and settlement groups.

NotaryNotaries are comparable to traditional Notary Public services that provide
reliable witness to events. In simple terms, notaries confirm the validity oftransactions and prevent double spending. They need not know the content
of transactions.

Real-Time Gross
Settlement (RTGS)

Real-time gross settlement is the process of settling payments on an
individual order basis.

Settlement BankA DTCC settlement bank is a DTCC settlement participant who has access to afederal reserve account and can settle on behalf of other brokers.

Tokenization

Tokenization in this pilot program refers to the act of digitally representing
information uniquely on a distributed ledger.

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Introduction
Financial markets around the world are experiencing a paradigm shift
as distributed ledger technology and tokenized assets are challenging traditional business models
and market infrastructure providers. As the world progresses towards a digital asset future, private
and public institutions are continuing to explore benefits and implications across various digitalasset use cases. Digital currencies are being introduced to streamline traditional payment networks
and provide greater transparency across retail, wholesale, and cross border transactions.
Around the globe, digital assets of all designs are gaining traction as DLT-based infrastructures are
beginning to complement traditional market infrastructures. CBDC has been proposed as a logicaladvancement and an alternate form of fiat money for central banks. CBDC is garnering significant
attention with several initiatives being explored by private and public institutions. Over 105 countries,
representing about 95 percent of global GDP and 19 of the G20 countries are exploring CBDC. [3]The European Central Bank (ECB) is currently undertaking a two-year investigation phase of its retail“Digital Euro” project (anticipated to be completed at the end of 2023)[4] and is considering whether
new technologies like DLT could improve settlement in central bank money for wholesaletransactions.[5] China reports that its digital fiat currency, the eCNY, is held in over 250 million digitalwallets and is already responsible for a remarkable 87.5 billion yuan ($13.78 billion) worth oftransactions.[6]112 Countries
Currency Unions
Tracked
Launched 11
Pilot 15
Development 26
Research 46
The Atlantic Council tracks 112 Countries / Currency Unions.
CBDC initiatives that are inactive or canceled are not pictured on this map[3] Atlantic Council, Central Bank Digital Currency Tracker[4] European Central Bank, Digital Euro: Investigation Phase[5] European Central Bank, Digital Euro: Demystifying wholesale central bank digital currency[6] China Internet Watch, China’s digital currency eCNY reached 261 million digital wallets

14 | DIGITAL DOLLAR PROJECT + DTCC

In the U.S., private and public sectors are beginning to explore digital assets to understand how theAmerican economy can harness their potential. The Federal Reserve Board of Governors andReserve Banks have been analyzing a potential U.S. CBDC and fostering dialogue around the issue.
Earlier this year, President Joe Biden issued the “Executive Order on Ensuring Responsible
Development of Digital Assets” (the Executive Order) directing the Administration to promote
development of digital asset and CBDC technologies consistent with American values and legal
requirements.[7] Last month, the White House’s Office of Science and Technology Policy (OSTP)
released a paper that discusses the many design challenges and opportunities to be examined inconsideration of a U.S. CBDC.[8] This month, the Federal Reserve Bank of New York’s Innovation
Center, released its Phase One report on Project Cedar, examining wholesale cross-border
payments.[9] Additional policymakers, including members of the U.S. Congress, are also considering
the potential benefits and risks.
In 2020, Accenture (NYSE: ACN) and the Digital Dollar Foundation partnered to create the DDP toadvance exploration of a U.S. CBDC or a “digital dollar”. The purpose of the DDP is to encourage
research and public discussion on the potential advantages and challenges of a digital dollar,
convene private sector thought leaders on this topic, and propose possible models to support the
public sector adoption. In May 2020, the DDP published a white paper describing a champion modelof a U.S. CBDC.[10] As the Federal Reserve and other public sector initiatives explore CBDC
technology, the DDP strongly believes that the private sector should have a voice in the design of adigital dollar that meets the needs and requirements of the industries that use it. To further theirresearch, the DDP launched a series of pilot programs[11] that, in collaboration with the industry,
explore potential uses for a U.S. CBDC or “digital dollar”. The pilots are intended to define
requirements, raise questions, and identify potential implications and benefits across various
use cases.
Earlier this year, DTCC joined the DDP to launch the first pilot in the program[12]. It is the U.S. capital
market industry's first exploration of U.S. CBDC in post-trade infrastructure by private sector
participants. DTCC in collaboration with DDP and support from Accenture, designed and built a
prototype to settle tokenized securities with simulated CBDC tokens to understand feasibility, design
requirements, and functional challenges, and market opportunities. The findings of this initiative will
be used with outputs from other DDP pilots to help inform the design considerations of a digitaldollar.

[7] U.S. Department of the Treasury, Fact Sheet: Framework for International Engagement on Digital Assets[8] The White House, Office of Science and Technology Policy. Technical Evaluation for a U.S. Central Bank Digital Currency System[9] The Federal Reserve Bank of New York, Project Cedar[10] The Digital Dollar Project, Exploring a US CBDC
[11] Accenture, Digital Dollar Project to Launch Pilot Programs to Explore Designs and Uses of a U.S. Central Bank Digital Currency[12] DTCC, DTCC building industry's first prototype to support digital U.S. Currency in the clearing & settlement process as part of Digital
Dollar Project effort

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The Pilot Experiment
Scope, Objectives, and Approach
The DDP and DTCC formed a research team to understand how DTCC could utilize a U.S. CBDC
network as a cash settlement system for the settlement of security transactions. Over the course of
6 months, the pilot assembled industry experts to design the functional requirements of CBDC
settlement and discuss the implications with pilot participants from commercial banks.

The pilot’s objectives were to:1

Design a logical architecture that could support connectivity and settlement
across DTCC’s Digital Settlement Network prototype and a simulated Federal
Reserve CBDC network;

2

Deploy and test a prototype to efficiently demonstrate security and CBDC
settlement across networks;

3

Refine the functional requirements of the DDP’s Champion Model to support
post-trade security settlement; and4Engage with industry participants to identify the potential business implicationsof a security-CBDC settlement model.

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To conduct the experiment, the teamdeveloped a prototype to demonstratesecurity settlement with CBDC tokens.
This prototype consisted of
3 core components:

1

2

3

A simulated CBDC network that
could support cash settlement forparticipant banks. While guidancefrom the Federal Reserve on how a
CBDC would be designed is not yet
available, the pilot team modeled thesimulated CBDC network after thefunctional requirements of the DDPChampion Model. As the teamdeveloped the simulated CBDC
network, various technical decisions
were made to design an ideal cash
settlement model. Assumptions
relating to such network arereviewed later in this paper.
DTCC’s Digital Settlement Network
prototype which was enhanced tooffer CBDC settlement as an option
for market participants.
An integration approach to connect
the simulated CBDC network and
DTCC’s Digital Settlement Network
prototype together. The integration
layer used a “logical architecture”
that supports an orchestration
model which instructs settlement
and ensures that asset and cash
settlement occurs on both networks.

Out-of-Scope
Experimentation
There were many questions andconsiderations that the pilot could havepursued but instead deferred, including
exploration of the concepts that havebeen well studied by other global
CBDC initiatives.

Scalability and Performance:
The pilot team chose to focus on designing a
logical implementation model as opposed toscalability and performance, as the scalability of
DLT-based systems has already received
considerable attention. For example, the Federal
Reserve Bank of Boston and the Massachusetts
Institute of Technology recently exploredscalability and resilience in the first phase of
their Project Hamilton Experiment[13]. Given theprocessing volume requirements of DTCC and apotential CBDC network, we expect this to be a
critical area of continued exploration.

Issuance and Distribution:
The pilot did not hypothesize how a CBDC
would be distributed by a central bank tocommercial banks but instead assumed thatthe pilot participants, as regulated financial
institutions, were already using CBDC tokens forcash settlement.

[13] Federal Reserve Bank of Boston, Project Hamilton Phase 1 Executive Summary

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Operational and Business Requirements
To design the settlement model for security settlement in the pilot, the team started by identifying
the operational requirements that the CBDC network and connectivity model would need to ensuresufficient settlement capabilities. Several approaches to connect the networks and execute
settlement were considered, and ultimately led to a solution design that offered network security,transaction confidentiality and an efficient model for settlement.

Achieving Settlement Across Two Distinct Networks
The pilot explored atomic settlement of tokenized securities managed on DTCC’s Digital Settlement
Network in exchange for cash tokens on a distinct and separate simulated Federal Reserve CBDC
network. The project assumed that a Federal Reserve CBDC will be solely used as a cash network,and not support other type of asset management, to maintain the jurisdiction model of the Federal
Reserve. Some foreign research initiatives have designed DLT networks that support cash and asset
tokens on the same network. The decision to use a ‘cash-only’ network was driven in part by existing
directional commentary from the Federal Reserve[14] as well as practical implications of such an
expansion in the Federal Reserve’s responsibility.

Maintaining a Trusted Third-Party to Satisfy Settlement
To ensure settlement on both networks and continue to utilize the efficiencies offered by central
counterparty clearing (CCP), the team identified that there remained a need to have a neutral third
party to manage the risk of a communication failure when trades are being executed. The third party
is privy to the transaction on both the CBDC network and DTCC’s Digital Settlement Network to
resolve any disputes on transfer across networks. While the third party does not necessarily need tobe the Federal Reserve or DTCC to manage settlement finality, for the purposes of this pilot, DTCC
was the trusted third-party. The team designed a system for recording and managing the movementof assets on both networks through the third party. The paper will further discuss below how thethird party was hosted and given visibility into the transactions on each network.

[14] In Project Hamilton, the Federal Reserve Bank of Boston designed a CBDC network prototype that acts as a payment instrument anddoes not explore the ability to represent other asset types on the network.

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Designing a Settlement Model that can Support Multiple Use Cases
The pilot was developed with the view that industry participants should have the ability to choose
settlement models based on their preferences and designed the tokenized settlement prototype withthe ability to support multiple types of settlement. Participants can elect their preferred type ofsettlement if all necessary participants agree to the proposed settlement timing and conditions. The
team designed a CBDC network and architecture model that could support requirements acrossbilateral real-time settlement, intraday netting cycles, and end-of-day netting cycles.

CBDC Requirements
In addition to the functional pillars of the DDP Champion Model, and without direct input from theFederal Reserve, the team made certain design and functionality assumptions of a potential Federal
Reserve CBDC network. The pilot assumed:
The Federal Reserve is the sole CBDC issuer and governor of the CBDB network and has
its own presence on the network.
The CBDC network is a permissioned network where only the transaction participants
see their transaction information. For the purposes of the prototype, access to the
CBDC network is governed by the Federal Reserve and is limited to existing settlementbanks and DTCC. While a CBDC network may ultimately provide access to a broader set
of financial institutions, the team decided to begin with existing reserve account access.
All settlement banks have a presence on the network that allows them to receive issued
CBDC from the Federal Reserve, transfer it to another settlement bank, and redeem
CBDC at the Federal Reserve. Liquidity management on the CBDC network is required
but out of scope of the pilot; the pilot assumes that the buyer’s settlement bank has
sufficient liquidity to successfully complete settlement transactions.
In addition to this basic CBDC functionality, the CBDC network must support conditional
CBDC payments consisting of two phases. The first phase locks, or encumbers, CBDC
tokens, while at the same time fixing the conditions for unlocking them. The second
phase unlocks these tokens to the recipients, depending on whether all conditions are
satisfied. The use of this capability to achieve atomic DvP across DTCC’s Digital
Settlement Network and the CBDC network is described below.

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Federal Reserve Account Model: Cash Settlement

EXISTING MODEL

Federal Reserve
The Federal Reserve credits anddebits commercial bank reserve
accounts

Settlement Bank A
Reserve AccountNational Settlement
Service (NSS)

Settlement Bank B
Reserve Account

DTCC
Cash obligations are aggregatedand messaged through FFS to
the Federal Reserve

Fed Funds Settlement
System (FFS)

Settlement Bank A
Settlement Balance

Operations

GovernanceFollows all SEC regulations & compliance procedures
Follows all DTCC & NSCC policies & procedures
Follows identity management requirements (KYC,
AML, etc.)
Standard settlement time is T+2

1. Aggregate account balances are debited andcredited throughout the day
2. At the end of the day, final fund balances areconsolidated by FFS to send to NSS to update
participant’s commercial bank reserve accounts

Tokenized CBDC Model: Cash Settlement

THEORETICAL MODELCBDC Transfer

Federal Reserve
CBDC tokens are exchanged between
commercial bank CBDC nodes

Settlement Bank B
Settlement Balance

Settlement Bank A
CBDC Node

Federal Reserve
Observer Node

Settlement Bank B
CBDC Node

DTCC
Instructions are automatically sent
across participants to instruct the
movement of CBDC tokens

Settlement Bank A
Network NodeOperations
What’s Unchanged
Standard settlement times are unchanged
What’s Different
Reduces the need for multiple messages andreconciliations
CBDC can be settled at the same time as securities
Liquidity and risk are improved for buyers andsellers

DTCC
Observer Node

Settlement Bank B
Network NodeGovernance
What’s Unchanged
Follows all SEC regulations & compliance procedures
Follows all DTCC & NSCC policies & procedures
Follows identity management requirements (KYC, AML, etc.)
What’s Different
The Federal Reserve owns & operates wholesale CBDC & its
distribution without needing to facilitate the updating ofreserve accounts
The DTCC is an observer of CBDC transactions without
needing to instruct end-of-day cash settlement

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Achieving Network Connectivity
and Settlement Assurance
The encumbrance capability introduced above is used to support the following steps in thetransaction workflow:

1.The seller of the securities creates a transaction to encumber the security tokens corresponding
to the agreed trade. The key to unencumber the security tokens is shared with the Settlement
Manager (an automated transaction orchestrator on DTCC’s Digital Settlement Network). The
conditions to unlock the tokens are as follows:
The buyer can take control of the securities upon confirmation that the CBDC assets
have been encumbered (or transferred, as transfer can happen as soon as the tokens
are encumbered). The key to unencumber the security tokens is provided to the buyer by
the Settlement Manager when the confirmation message from the CBDC network
is received.
A DTCC node on DTCC’s Digital Settlement Network is granted permission to determine
control of the assets after this time-out. That is, if the CBDC transfer does not finalize ontime (or at all) then DTCC takes control of resolving the transaction. This gives DTCC
the opportunity to determine what went wrong. If the CBDC transaction succeeded (butfor some reason this information did not reach DTCC’s Digital Settlement Network ontime), then DTCC can transfer the security tokens to the buyer. Otherwise, DTCC will
return the security tokens to the seller.
2.The buyer of the securities and the Settlement Manager will both have visibility into theencumbrance transaction completion. The Settlement Manager then informs the Payment Manager(an orchestrator on the CBDC network, which is administered by DTCC on the DTCC node) to notify
the buyer’s settlement bank in the CBDC network to encumber the agreed amount of CBDC tokens
and transfer to the seller’s settlement bank. Like DTCC’s Digital Settlement Network conditions, theconditions to unencumber the CBDC tokens are as follows:
The seller’s settlement bank can take control of the payment if evidence of finalizationof the security tokens encumbrance is provided before a given time-out. (In the pilot
implementation, this would always be true, as the encumbrance transactions are done
serially. For faster throughput, both network encumbrances could be done in parallel,with the tradeoff of additional communication to determine when both assets havebeen encumbered.)21 | DIGITAL DOLLAR PROJECT + DTCC

In case of time-out, a DTCC node on the CBDC network granted permission to determine
control of the assets after the time-out. That is, if there are errors or communication
failures preventing cross network communication, then DTCC would assume control toresolve the transaction. This gives DTCC the opportunity to determine what went wrong.
If the security tokens transfer succeeded (but for some reason this information did notreach the CBDC network on time), then DTCC can transfer the CBDC to the seller’s
settlement bank. Otherwise, DTCC will return the CBDC to the buyer’s bank. No changeof control would happen without clarity of completion on the securities side.
3.The seller’s settlement bank (receiver of CBDC tokens) and the Payment Manager will both havevisibility to the encumbrance transaction completion. The Payment Manager then informs the
Settlement Manager.
4.The Payment Manager then provides the key to unencumber the CBDC assets to the seller’s
settlement bank. The settlement bank then unlocks the CBDC tokens.
5.The Settlement Manager then provides the key to unencumber the securities assets to the buyer.
The buyer then unlocks the security tokens.
In case of failures or time-outs in the process, DTCC can determine the cause based on its presence
on both networks and role in the encumbrance, and it can either roll back the transaction by
returning the locked assets to the original owners or complete the transaction by unlocking theassets for the recipients.

In summary, normally, both delivery on DTCC’s Digital Settlement Network and payment on the
CBDC network will complete automatically, without intervention by DTCC. In failure cases(time-outs or technical errors), DTCC can assess the situation and resolve these appropriately.
The result is atomic DvP: either both securities and CBDC assets are transferred, or both returnto their original states.

22 | DIGITAL DOLLAR PROJECT + DTCC

Pilot Architecture Design
DTCC’s Digital Settlement Network

Simulated Fed CBDCCONFIRM
RECEIPTPROVIDE
KEYS

12

5

STS

Once the trade is validated andpasses settlement controls

3

REQUE

KEYS

11

Buyer’s
Settlement BankNOTIFIES

Buyer
Custodian Bank

REQU

7
10
NOTIFIES

Settlement
Manager (SM)

Payment
Manager (PM)2SellerCustodian Bank

KEYS

1

ESTS

6

4

8

9
PROVIDES
KEYS

CONFIRM
RECEIPT

Seller’s
Settlement Bank1

SM requests the security tokens to beencumbered

7

SM instructs the PM to complete payment by
unlocking the CBDC tokens

2

The seller provides the keys to the SM to
unencumber the security tokens

8

PM provides the keys to the Seller’s settlementbank to unencumber the security tokens

3

SM notifies the Payment Manager (PM) about
the security token encumbrance and instructs
the PM to initiate the CBDC transaction

9

Seller’s settlement bank acknowledges thereceipt of the keys and unlocked CBDC tokens

4

PM requests Buyer Settlement Bank toencumber the CBDC tokens

10

PM notifies the SM of the fund movement

5

Buyer Settlement Bank provides the keys to the
PM to unencumber the CBDC tokens

11

SM Delivers the security key to the buyer

6

PM notifies the SM about the encumbrance of
the CBDC tokens

12

Buyer’s custodial bank acknowledges thereceipt of the keys and unlocked security
tokens23 | DIGITAL DOLLAR PROJECT + DTCC

Pilot Findings
The pilot demonstrated how DTCC could utilize CBDC in post-trade settlement, informed design
options for future CBDC settlement models, and provided valuable insights into the benefits that a
CBDC model can offer the industry.

Design Decisions and Conclusions
Transparency models
When designing a CBDC model, striking a balance between transaction confidentiality, auditability,
trust, and control can result in a variety of CBDC models that can fulfill the use cases with different
levels of compromise across the dimensions. The pilot adopted an approach to maximize
transaction confidentiality. This meant starting with an assumption that only the parties to the trade
would see the details of the transaction. With the Federal Reserve’s role in current settlement
processes and the pilot’s goal of minimizing fundamental changes to the settlement banking
system, the CBDC network was set up as a permissioned network for settlement banks, where theFederal Reserve would also have visibility into transactions on the network for auditability throughnotary nodes, which sign every transaction on the network to prevent double spending of assets.
To confirm that the cash portion of a transaction has been settled, DTCC also needs to haveevidence of the cash token exchange. If the only parties with visibility into the transaction are thebuyer’s settlement bank, the seller’s settlement bank, and the Federal Reserve, there areseveral options:
1. Have transaction participants provide status confirmation. This means that the twoparties would need to agree on the status and would require the adoption of
mechanisms to address a situation where there is a disagreement on status between
the parties. Additionally, in the case of a bad actor, status delays or erroneous statusconfirmations would be detrimental to the settlement process.
2. Balance transparency versus transaction confidentiality. Making transactions
visible to the entire network enhances transparency but at the expense oftransaction confidentiality.
3. Have the Federal Reserve confirm status. This means the Federal Reserve would be an
active party in transactions and responsible for confirming every settlement transaction
on the network which may not be the most efficient approach.
4. Include a third party on the transaction to manage unforeseen operational challenges
between parties. Given that DTCC already has visibility into the parties to and amounts
of a transaction, DTCC could be added as a party to the CBDC transaction without any
additional impact to transaction confidentiality. This requires DTCC to be a participanton the CBDC network but does not require DTCC to have any special permissions, if the24 | DIGITAL DOLLAR PROJECT + DTCC

CBDC network supports multi-party transactions. This was the approach taken by
the pilot.

Cross-Network Connection
Multiple approaches were considered to enable transacting across two separate DLT networks. The
pilot focused on a set of capabilities to address the functional use cases, while non-functional
requirements remained out-of-scope. Because the networks are separate, transacting at the DLT
protocol layer used by nodes within a network was not feasible. Consequently, a higher connectivity
layer is required, and for simplicity, REST APIs were used to connect to services hosted on both thesecurities and CBDC networks, using services connecting over HTTPS. This effectively enabled
network-specific logic (in the form of off-chain services and on-chain smart contracts) to be createdfor each network. Unlike a transaction within a single DLT network, however, the existence of two
networks resulted in a distributed transaction that required orchestration across the networks toprovide guarantees of atomic settlement. Alternative approaches could potentially enable
connectivity with differing tradeoffs.

Orchestration Model
Orchestration between DTCC’s Digital Settlement Network and the CBDC network has the unusual
characteristic that the delivering and receiving parties on each network are not necessarily thesame. The buyer and sellers on DTCC’s Digital Settlement Network may have distinct settlementbanks, and therefore none of the participants on the networks would have visibility into both
networks. (There are cases where a buyer or seller is also a settlement bank, but because it won’t
always be true, the process does not assume shared visibility to both networks by any party). The
two main approaches explored for managing communication across networks were:
1. Require and depend on each party to communicate with its settlement bank in real-timethroughout the transaction. While the buyer and seller would each have establishedcommunication channels with their settlement banks, relying on communications
between the parties and their settlement banks to facilitate transaction workflows
timely and accurately places a burden on every participant in DTCC’s Digital Settlement
Network and every settlement bank to build systems that support this specificcommunication and transaction flow.
2. Set up an orchestrator to handle all settlement transaction communication between the
networks – in the settlement scenarios being analyzed in the pilot, since DTCC has
visibility to both the securities transactions and the CBDC transactions, DTCC canorchestrate the transactions and facilitate communication across the networks. This
minimizes the dependencies on communication between parties, at the expense ofincreasing dependence on DTCC.

25 | DIGITAL DOLLAR PROJECT + DTCC

DTCC’s Responsibilities
In a model where both security and cash positions are settled on two different DLT-based networks,
it is possible that a transaction completes on one network, but fails or times out on the othernetwork, and one party ends up with both assets. In the case of a failure, some form of remediationis required to ensure all parties’ positions are settled properly.
If only a buyer and seller (and their settlement banks) have access and control over a transaction,
they may not be incentivized to remediate failures in the transactions in a timely fashion (and in fact
may benefit from delays in the transactions). Accountability for delays in transaction completion
would also be difficult to maintain. As a trusted third party that would already have visibility into
these transactions, DTCC is uniquely positioned to address transaction failures without creating
additional network security risk.
The model employed in the pilot defines DTCC’s role in the settlement transactions as follows:
Manages access to and governs the DTCC Digital Settlement Network
Initiates settlement transactions on DTCC’s Digital Settlement Network based on
incoming trades,
Is party to every securities settlement transaction for visibility and potential remediation,
Is privy to CBDC transactions to ensure that DTCC settlement instructions are satisfied
for visibility and potential remediation,
Manages the automated orchestration of settlement transactions across the two
networks,
Stores the keys used to lock / encumber tokens and transfers the keys (or directly
unencumber the tokens) at the point when the assets on both networks have been
encumbered, andDetermines and implements the appropriate course of action to either complete or
rollback the transaction in case of a transaction failure or time-out on either the
securities or CBDC networks. More details about how this is accomplished are provided
in the following section.

Encumbering Assets
In distributed transactions, there are two common approaches to maintaining data consistency
across independent services – using two-phase commits or using compensating reversal
transactions to undo initial transactions in case of rollback. In scenarios where assets can be
consumed or spent in the time between an initial transaction and a reversal, the use of

26 | DIGITAL DOLLAR PROJECT + DTCC

compensating transactions cannot guarantee that the original state will be restored. Also, in a DLT
scenario, there is no way to force a compensating transaction to happen. As a result, the approach
used in the pilot focused on a two-phase commit.
A significant downside to two-phase commits is that resources can be locked and unavailable forextended periods of time if transactions take too long. This can cause bottlenecks and significantly
limit throughput or activity of the system. This type of transaction across networks therefore needs
to be completely automated, with expected completion times (and transaction time-outs) within amanageable period for participating parties. The pilot did not try to define an optimal time-out
window or measure system throughput at scale but assumes that it would need to be measured inseconds to accommodate multiple individual DLT transactions and complete in under a minute to
not tie up assets for an extended period. Given that the velocity of assets on these networks will bedirectly impacted by system performance, it was critical to set time frames based on expected
performance of the network.

The pilot implemented two-phase commits by encumbering tokens and preventing them frombeing spent, and by putting conditions on their release for use by the receiving party. This is
like an escrow model, but in this case, the smart contract, rather than a third party, controls
access to the assets.

The encumbrances are established via smart contracts on each network, which lock the assets to betransferred, and then define the conditions under which they can be unlocked and transferred to thereceiver. Unlocking the assets requires the key used to encumber the assets initially, and that key ismanaged by the orchestrator from the time of locking, and then used to unencumber the tokens
when assets on both networks have been confirmed to be locked. So, the first phase of thetransaction involves encumbering the tokens on each network so they cannot be spent elsewhere,
and the second phase of the commit involves unlocking the tokens to release them for use by thereceiving parties.
Throughout this process, technical failures[14] are possible at any point. If a failure is encountered
before assets on either network have been encumbered, the transaction will time out and no assets
will be transferred. Once assets on either network have been encumbered though, remediating a
failure depends on whether the assets on either network have been unlocked already. It is criticalthat a rollback is not performed on one network when the assets on the other network have been

[14] Technical failures could be due to several unanticipated problems such as a lack of cash at the time of asset movement, acommunication failure, or general infrastructure failure.

27 | DIGITAL DOLLAR PROJECT + DTCC

unlocked already. It is critical that a rollback is not performed on one network when the assets on
the other network have been successfully transferred. Consequently, in these failure or time-out
scenarios, assets cannot be automatically returned to the original owner. Only with knowledge ofwhat happened on the other network can an appropriate decision for remediating the situation be
made. DTCC, as the only party with visibility into both transactions, is the logical party to make thisdecision without relying on timely communication between the parties to the transaction. To enable
DTCC to manage a rollback of the entire transaction, or even complete the transaction in case of
failure, DTCC would need to be given permissions on the transaction to take these actions. Thispermission can be granted via the encumbrance mechanism. As such, DTCC was given the ability to
unlock the tokens and transfer to the recipient or return assets to the original owner after a time-out
had been reached. There were two ways for tokens to be unencumbered – one with a successfultransaction using the keys to unlock the assets, and one where the time-out is reached, at which
point control of unencumbering the tokens is passed to DTCC.

While the model that the pilot utilized involved encumbering assets on both networks, otherapproaches involving different tradeoffs were considered and determined to be viable. For thesettlement scenarios, DTCC’s Digital Settlement Network is modeled as a DLT network where
encumbrances are possible. There are many situations where an encumbrance may not be possible
on one side of the transaction, though. For example, in a CBDC payment for a physical asset, an
encumbrance on the CBDC network could be used, and the physical asset would be transferred after
the encumbrance is confirmed on the CBDC network. A third party would again be needed to
manage rollback in case the physical transfer is not made successfully. In the case where payment
is confirmed on the CBDC network before a transfer is made elsewhere (analogous to merchantpayment transactions), then an encumbrance is not needed on the CBDC network. In the pilot, thesettlement model would be very similar if there were only an encumbrance on DTCC’s Digital
Settlement Network (and not on the CBDC network). The major difference would be that theunlocking of security tokens could only occur after payment had been confirmed, rather thanallowing security tokens to be unlocked after the encumbrance of CBDC tokens had
been
confirmed.

28 | DIGITAL DOLLAR PROJECT + DTCC

Business Opportunities and Tradeoffs
Identified from CBDC Settlement
The pilot focused on designing a logical model and building a prototype that could support CBDC
settlement and identified the opportunities and tradeoffs presented by such prototype.

Funding and Risk Tradeoffs: From the pilot, the team learned that the expected benefits for theindustry varied based on the settlement model type. Due to the complete settlement finality
expressed above, deliverers and receivers must have the assets and cash available to settle at theagreed upon time. This is different than today’s settlement model where participants settle
securities throughout the day free-of-payment while cash is settled at the end of the day to fulfill
delivery of the assets. Each of the settlement models presents different levels of settlement risk
and carries different asset and cash liquidity requirements. The value derived from each model
will also depend on the level of industry adoption by participants. Below are summaries of thevarious models:
Today’s End-of-Day Netting Cycles and Settlement Model:
Today’s industry standard of T2 End of Day settlement moves the securities at the timeof settlement but moves cash at the end of the day through the Federal Reserve. The
netting model provides transaction efficiencies by distilling down transactions to only
move an aggregate debit or credit. NSCC’s multilateral netting model guarantees
settlement, where NSCC becomes the CCP to, and therefore guarantees the settlementof, trades. This allows brokers to offset buy and sell positions executed against multiple
counterparties into a single counterparty and reduces payment/security obligations andprovides a guaranty of settlement for those obligations – thus also reducing credit andfinancial exposure[16]. This model separates the “settlement” of a transaction and theactual “delivery” of the assets. This also allows industry participants to go into an
intraday deficit throughout the day if they can acquire the assets by the end of the day.
End-of-Day Netting Cycles and Settlement with CBDC (T2, T1, or T0 EOD):
End-of-day netting cycles and settlement with CBDC is like today’s model wheretransactions are settled throughout the day, but cash is moved, and assets are
unencumbered at the end of the day. The current standard is T2, but the industry isplanning to move to T1 and is exploring T0 as a potential option. CBDC and tokenizedassets may make asset management more efficient but would not provide greaterliquidity and risk benefits compared to existing reserve account settlement.

[16] DTCC, Building the Settlement System of the Future

29 | DIGITAL DOLLAR PROJECT + DTCC

Intraday Netting Cycles and Settlement (T0 Intraday):Intraday Netting Cycles with CBDC as the cash settlement medium begins to provide
benefits to participants. The industry does not yet have a multilateral cash settlement
mechanism that can support intraday trading. This could be achieved with a traditional
payment mechanism, but CBDC may provide the additional transparency andautomation needed to increase industry appetite and encourage adoption. T0
settlement with tokenized securities and cash would ensure that deliverers andreceivers have sufficient assets at the time of settlement.
Real-time Gross Settlement or “Bilateral Settlement” (T0 RTGS):
Real-time Gross Settlement is when trades are initiated and settled between two
participants without the settlement assurance of netting. The U.S. does not currently
provide a RTGS settlement option, which is available in global markets. RTGS has been
touted by digital currency advocates as an ideal use case for CBDC settlement. Crypto
markets predominately use RTGS settlement models to settle digital assets in real time.
RTGS would require that both participants have the cash and securities available at thetime of settlement and could atomically settle the transaction. Tokenized cash andsecurities provide an efficient RTGS model.

DTCC Operational Efficiencies: The CBDC settlement prototype demonstrated that settlement oftokenized assets and cash can effectively be automated. This automation can enable settlement
without the need for DTCC or the Federal Reserve to manually send settlement instructions, update
files, and confirm that settlement has occurred. It should be noted that, although not currently
available, the existing cash settlement system through FFS and NSS could be enhanced to provide
an automated settlement mechanism. A CBDC however could provide greater transparency,
resiliency, and flexibility to the industry.

Transparency and Reporting Benefits: In today’s system, DTCC sends a batch file to the Federal
Reserve to update settlement banks’ accounts held at the Federal Reserve based on participant
settlement activity. The Federal Reserve uses the received files to record settlement activity. In a
DLT-based settlement future, settlement transactions can include tags to identify those specificsettlement types for which the Federal Reserve would have real-time visibility to. DLT-based
settlement won’t require the manual process of sending report files because the Federal Reserve
would be able to determine DTCC settlement activity at any point in time. The elimination of manual
reporting could facilitate the industry’s adoption of accelerated settlement options.

30 | DIGITAL DOLLAR PROJECT + DTCC

Settlement Finality: The pilot settlement prototype supported the ability to guarantee settlement of
security tokens and CBDC tokens, ensuring that cash and assets are either both transferred, or
nothing is transferred (in which case the settlement transaction could be retried). The settlement
finality of cash and assets promises that the transaction will always complete or be reverted and will
never leave a participant in a situation where the assets move without the cash. This level ofsettlement finality offers a resilient settlement model where participants can be confident at thetime of settlement that the assets and cash are settled.

Varied Benefits Across Use Cases: DTCC supports flexible optionality for industry participants andfound that a CBDC payment infrastructure can facilitate a range of settlement use cases including
intraday and end-of-day netted settlement cycles or real-time bilateral transactions.

31 | DIGITAL DOLLAR PROJECT + DTCC

Refining the DDP Champion Model
Throughout the pilot, the team explored the DDP’s Champion Model to assess how the functional
assumptions hold up in real-world scenarios. The pilot was able to add context to pillars of the DDPChampion Model that can be tested in future pilots DDP will administer with other organizations that
hold financial service responsibilities in US markets.

Privacy, Transactional Confidentiality, and Data Distribution
A core principle of the DDP’s Champion Model is individual privacy in the use of CBDC. In awholesale settlement model, the transaction is executed at an organizational level, not an individual
one. Instead of preserving an individual’s privacy, a CBDC network will need to ensure theconfidentiality of data relating to the transactions of participating organizations. Only theparticipants of a transaction, the clearing house, and the Federal Reserve would have access to thetransaction data. This is of course different from public DLT models where the whole ledger isvisible to all participants.

Technology decisions and design choices driven by functional needs
Another core DDP tenet is that the technology decisions and design choices should be driven byfunctional needs. Accordingly, the pilot was able to identify functional needs for a post-trade usecase. Future DDP pilots should consider additional functional needs and understand how thetechnology can satisfy diverse needs across use cases.
Multilateral Settlement: To enable DTCC to know the status of a transaction, the CBDC
network would need to allow multiple participants to be party to such transaction
Asset Encumbrance Mechanisms: To guarantee the completion of a transaction across
two networks, an encumbrance mechanism is necessary to provide confidence thattokens would not be re-spent or reclaimed before the transaction completes32 | DIGITAL DOLLAR PROJECT + DTCC

CBDC Access Implications:
The decision to issue a wholesale or retail CBDC will have varying implications on the existing
settlement model in the U.S. Currently, only certain banks, who have access to Federal Reserve
accounts can settle cash through the Federal Reserve. This restriction of access is one reason why
brokers use settlement banks to settle cash obligations. There is already an ongoing discussion in
the U.S. to simplify and potentially broaden Federal Reserve account access to non-traditionalbanking institutions.[17] The implications of issuing a CBDC with broad industry access will sharemany of the tradeoffs of extending access of the existing Federal Reserve payment system. DTCC
participants with access to a digital dollar could settle for securities without having to rely on a bankwhich holds an account with the Federal Reserve. As a result, reducing the industry’s dependence on
the settlement bank model, which in turn could reduce systemic risk by distributing cash settlement
responsibilities across additional organizations. This expanded access to the Federal Reserve
payment system could also change the role of existing settlement banks, shifting their focus to linesof credit and point solutions for market participants.

[17] Board of Governors of the Federal Reserve System, The Federal Reserve Board announced guidelines to establish a transparent, riskbased, and consistent set of factors when reviewing requests to access Federal Reserve accounts and payment services

33 | DIGITAL DOLLAR PROJECT + DTCC

FutureExploration
The pilot demonstrated how a CBDC could be used by industry participants and
DTCC in the context of securities settlement. It also identified importantquestions and helped establish future areas of exploration for a U.S. CBDC.
Further Measure Business Value for Industry Participants
During the pilot, participant feedback indicated there could be commercial benefits to settling
securities transactions with CBDC. Future exploration should seek to quantify the benefits ofincorporating a CBDC into the settlement process. Such studies should compare CBDC settlement
models against existing settlement models to accurately measure risk and funding impacts onparticipants. They should also explore margin requirements, impacts to risk controls, or the ability to
go into intraday deficits. Finally, experimentation should seek to measure how shock resistant a
CBDC network would be under periods of high volatility or liquidation.

Identify Digital Ecosystem Impacts
It should be assumed that, if developed, a CBDC network will exist alongside traditional networks aswell as private industry digital asset networks. Future research should explore integration
requirements for co-existing networks. The pilot identified that different degrees of Federal Reserve
account access would have varying effects on the application of CBDC within the existing
ecosystem. Further initiatives should explore how a CBDC network could change the relationshipbetween industry participants and their settlement banks.

34 | DIGITAL DOLLAR PROJECT + DTCC

Explore Ecosystem Adoption Requirements
Many pilot participants shared that their own adoption of CBDC would depend on the degree ofindustry adoption. Further consideration should be given to the number of DTCC members andindustry participants needed to adopt CBDC technology in order to realize meaningful
operational efficiencies.

Refine Technology Requirements
The team strove to design a prototype that satisfied the functional requirements of the DDP’s
Champion Model and could support the business requirements of DTCC’s settlement system. It also
identified several technology questions that will require further thought.
Scalability and Performance: Future exploration into performance requirements andscalability capabilities would provide greater insights into network impacts andtechnology requirements.
Network Interoperability and Standards: Further exploration is required to understandhow various DLT networks would harmonize and fragment data or liquidity.
Participant Integration Requirements: Additional work to understand the requirements
more fully for participants to integrate with a CBDC network and DTCC’s Digital
Settlement Network is needed.

35 | DIGITAL DOLLAR PROJECT + DTCC

Conclusion
In keeping with the tradition of technological innovation, this pilot is the firstpost-trade securities settlement exploration of CBDC, of any denomination,
fully initiated by the private sector.
The team designed and deployed a prototype to support the application of tokenized securities and
CBDC for wholesale security settlement. The pilot provided a better understanding of theimplications and requirements of a CBDC securities settlement network. Bolstered by the expertiseof knowledgeable industry participants in analyzing its findings and assumptions, the pilot was animportant first step into exploring CBDC technology and should serve as a baseline for future posttrade CBDC exploration.
The U.S. dollar is the financial cornerstone of the U.S. and global economy. DTCC and DDP believethat a digital dollar should be carefully explored in consultation with key stakeholders in both the
public and private sectors. Future initiatives should challenge and refine the findings of the pilot todesign a CBDC network that can support a variety of nuanced use cases. While the decision
regarding whether to implement a U.S. CBDC rests with U.S. policymakers, the DDP and DTCC willcontinue their exploration of this technology to support efforts by the Federal Reserve Board ofGovernors and Federal Reserve Banks, Congress, other policymakers, and the broader industry as
part of ongoing activity to examine the benefits and challenges of a wholesale U.S. CBDC.

36 | DIGITAL DOLLAR PROJECT + DTCC

Appendix
Post Trade Settlement Introduction
The Role of DTCC
In capital markets, post trade infrastructure plays a critical role in ensuring that securities and cash
are safely settled between trading partners. DTCC supports the U.S. financial markets by providing
post-trade clearing and settlement services. DTCC, through its clearing agency subsidiaries, settles
securities transactions on behalf of buyers and sellers and functions as a central securities
depository by providing central custody of securities. In the context of a securities transaction,
settlement is generally the term applied to completion of the transfer of payment to the seller andownership to the buyer. It is the final step in the lifecycle of a trade.
DTCC’s role in the U.S. markets is to automate, centralize, and standardize the processing of
securities transactions to mitigate risk, increase transparency and drive efficiencies for industry
participants. Broker-dealers, custodian banks and asset managers use DTCC to settle securities
obligations and the resulting cash payments efficiently and securely.
DTCC, through its central securities depository subsidiary, provides settlement services for virtually
all equity, corporate and municipal debt trades, and money market instruments in the U.S. In 2021,
approximately 643 million securities valued at $152 trillion were settled by DTCC.

DTCC’s Digital Settlement Network
DTCC is owned and governed by the industry and is aligned with its clients to explore technology
and capabilities that can further support their needs. DTCC developed the DTCC Digital Settlement
Network prototype as part of its innovation research and development (R&D) to reimagine how newtechnologies can serve as a foundation for a future financial infrastructure ecosystem acrossvarious use cases. This prototype seeks to enable new functionalities such as accelerated
settlement cycles, true continuous netting and opportunistic security settlement, pre-positioning
benefits, prefunded bilateral trades, partial bilateral trades, and limited fail tracking.
A core feature of DTCC’s Digital Settlement Network prototype was the representation of traditional
assets as “tokenized” securities that live on a distributed ledger. In the United States today, the“movement” of financial securities is managed by DTCC subsidiaries. DTCC debits and credits

37 | DIGITAL DOLLAR PROJECT + DTCC

various account records to keep track ofparticipants’ security ownership. In the
DTCC’s Digital Settlement Network prototype,
rather than maintaining a record of security
ownership, the securities are represented as“tokens” on a distributed ledger which can be
moved between participants directly. In adigital token-based system, the token
contains all the information necessary for therecipient to verify the legitimacy, authenticity,
validity, and finality of the object transferred(i.e., the token).

DTCC’s Current Cash
Settlement ModelIn today’s model, when a settlementtransaction is processed by DTCC, DTCC
debits and credits the securities fromparticipants’ accounts and creates a cash
obligation based on the value of the agreed
upon transaction. At the end of thesettlement day, the cash obligations areaggregated and sent to the National
Settlement Service (NSS) to update theparticipants’ reserve account. NSS is amultilateral settlement service owned andoperated by the Federal Reserve Banks. The
service is offered to depository institutions
with Federal Reserve Bank master accounts
that settle for participants in clearinghouses,
financial exchanges and other clearing andsettlement arrangements.[20][18] DTCC, Evolution to an Accelerated Settlement Cycle[19] DTCC, DTCC to Launch Platform to Digitalize andModernize Private Markets[20] The Federal Reserve Services, The National Settlement
Service (NSS)DTCC’sDigitalJourney
In addition to DTCC’s Digital Settlement
Network prototype, DTCC is actively exploring
the value of DLT technology with industry
participants through various initiatives aimed atmodernizing the capital markets infrastructure
across the entire post-trade lifecycle whileproviding further settlement optionality forindustry participants. DTCC’s Digital Settlement
Network prototype, which the pilot leveraged,
incorporates novel settlement functionalities
and builds on DTCC’s modernization efforts.

Accelerated Settlement: DTCC has worked
with the industry to continually review the
impacts, systems, and processes of
securities settlement today, and the meritsof further acceleration, including T+1 andnetted T+0.[18]Digital Securities Management (DSM):DTCC has announced the Digital Securities
Management infrastructure to transform theprivate market ecosystem and enable thetokenization of securities to streamline theissuance, transfer, and servicing of private
market securities [19]Project Ion: DTCC launched Project Ion todevelop a settlement platform thatleverages DLT and provides a resilient,secure, and scalable alternative settlement
service. This platform became operationalin the pilot as an MVP (minimum viable
product), providing a parallel record andinfrastructure for over 100,00 bilateraltransactions settling daily in the DTC classic
settlement system.

38 | DIGITAL DOLLAR PROJECT + DTCC

DTCC participants that do not have reserve accounts with the Federal Reserve use a “settlementbank” to settle cash obligations with Federal Reserve accounts on their behalf. These settlementbanks are responsible for reconciling the cash movements that occurred within their reserve
account with the trading activity of their participants.
DTCC has continued to explore how new technologies, including DLT-enabled digital currencies, canhelp the industry achieve greater transparency, efficiency, and resiliency in the settlement of
securities transactions.

The Pilot’s Simulated CBDC Network
CBDC Overview
CBDC is a new digital currency and payment network model that is being explored by institutions
and central banks around the world. The DDP believes that if designed appropriately, CBDC could be
the next major innovation in U.S. money and could provide a modernized currency for a token-based
future. In the DDP’s Champion Model, a U.S. CBDC, issued by the Federal Reserve System, would
enjoy the full faith and credit of the U.S. government to have the same legal status as physical banknotes and reserves. CBDC has the potential to be a natively digital solution that integrates efficiently
with other DLT-based assets and infrastructures to support a Web 3.0 future.

Digital Dollar Project’s Champion Model
The DDP has studied findings from global CBDC initiatives to develop a “Champion Model” that canbe tested and refined through hands-on testing. The DDP recognizes that there are many
unanswered questions regarding a U.S. CBDC. As global experimentation produces new findings andrequirements, the DDP intends to refine its champion model to incorporate the needs of various
use cases.

39 | DIGITAL DOLLAR PROJECT + DTCC

The DDP Champion Model is made up of
the following functional tenets:
Tokenization:
A digital dollar would be a tokenized form of the U.S. dollar. Tokenization is the act of creating a digital
representation of the information, rights, and ownership of an asset, good, right, or currency and using that digital
representation to attest to facilitate transactions and ownership.

Third format of currency:
A digital dollar would operate alongside existing fiat currency and commercial bank money. It will mirror many
properties of physical money, including its ability to work alongside existing account-based systems. Existing money
supply could be converted on a 1:1 basis into CBDC to ensure there is no new money creation.

Maintenance of the two-tiered banking system:
A digital dollar would be distributed through the existing two-tiered architecture of commercial banks and regulated
financial technology intermediaries.

Privacy:
The digital dollar would support a balance between individual privacy rights, data confidentiality, and necessary
compliance and regulatory processes, in accordance with democratic norms, and ultimately reflecting thejurisprudence around the Fourth Amendment of the U.S. Constitution.

Monetary policy-neutral:
The introduction of a digital dollar would be a new representation of the U.S. dollar and would not change the money
supply. The technology that underpins it, such as programmability, may open more opportunities for the Federal
Reserve to transmit monetary policy but is subject to how a digital dollar is ultimately designed and implemented.

Technology decisions and design choices driven by functional needs:
The policy and economic requirements, such as scalability, throughput, and data privacy, of a digital dollar would
inform both the underlying technology and ultimate design choices.

Future-proofing the architecture through flexibility:
The chosen technological architecture would offer the flexibility to adapt based on policy and economic
considerations. A CBDC would be designed with the ability to be updated as technology advances.

Continued private sector innovation:
A digital dollar would act as a catalyst for innovation and will not be antithetical to the development of private
sector initiatives.

[21] For a full explanation of the Digital Dollar Project’s Champion Model, please refer to the DDP’s 2020 White Paper, Exploring a US CBDC

40 | DIGITAL DOLLAR PROJECT + DTCC

Using CBDC for U.S. Post-Trade Securities Settlement
Around the globe, it has been theorized that CBDC, combined with digital asset networks, has thepotential to streamline asset management, settlement, and reporting. Capital market institutions
have started to explore the potential of CBDC technology to unlock efficiencies and streamline posttrade settlement activity. Global projects outside of the U.S., such as Helvetia,[22] Jasper Phase 3,[23] and Ubin Phase 3,[24] were collaborative initiatives to examine the implications of post-trade
settlement with tokenized assets and CBDC. Each of these projects evaluated use cases in theirrespective jurisdictions and economies with varying requirements. These initiatives moved theneedle on global CBDC explorations and raised important findings and questions about CBDC
settlement.

Project

Publishing
Organizations

Helvetia

BIS, Swiss National
Bank, SIX Group

Jasper Phase 3

Bank of Canada,
Payments Canada,
TMX

Ubin Phase 3

MAS, SGX, The
Association of
Banks in Singapore

DDP & DTCC:
Security
Settlement Pilot

The Digital Dollar
Project (DDP) and
The Depository
Trust & Clearing
Corporation (DTCC)

Jurisdiction/
Region

Scope

Switzerland

Settlement of digital securities and a simulated CBDC thatboth exist on a single network
Exploration was performed from the perspective of thecentral bankCanada

Details a full lifecycle from issuance to redemption ofdigital securities and cash
Exploration was performed from the perspective of thecentral bank

Singapore

Settlement of securities and cash on separate and distinct
networks
Exploration was performed from the perspective of thecentral bank

USA

Settlement of securities and cash on separate and distinct
networks
Exploration was initiated and run by the private sector to
explore how CBDC would impact industry participants[22] Project Helvetia was a multi-phase investigation by the BIS Innovation Hub, the Swiss National Bank (SNB) and the financial
infrastructure operator SIX to explore how central banks could offer CBDC settlement in a future with DLT-enabled tokenized financial
assets, focusing on operational, legal and policy questions. BIS, Project Helvetia: A multi-phase investigation on the settlement oftokenised assets in central bank money[23] Phase 3 of Project Jasper was a collaborative research initiative between Payments Canada, the Bank of Canada, TMX Group,
Accenture and R3, to understand how DLT could transform the future of payments and securities settlement in Canada. Bank of Canada,
Digital currencies and fintech: projects[24] Project Ubin Phase 3: Delivery versus Payment (DvP) was a collaboration between MAS and Singapore Exchange (SGX) to develop
DvP capabilities for settlement of tokenized assets across different blockchain platforms resulting in the atomic settlement of digitalcurrencies and securities. Monetary Authority of Singapore, Project Ubin Phase 3: Delivery versus Payment (DvP)

41 | DIGITAL DOLLAR PROJECT + DTCC

References
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in central bank money.” Accessed October 26, 2022. https://www.bis.org/about/bisih/topics/cbdc/helvetia.htm.
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Digital Dollar Projectand DTCC: Security Settlement Pilot
November 2022