A group of major banks and the Federal Reserve Bank of New York have started to test the use of digital tokens representing digital dollars to improve how central bank money is settled between institutions.

Citigroup (C), HSBC (HSBC), BNY Mellon (BK) and Wells Fargo (WFC) are among the banks taking part, along with payments giant Mastercard (MA), the New York Fed announced Tuesday.

The 12-week proof-of-concept pilot program will explore the use of a platform known as the regulated liability network, or RLN, whereby banks issue tokens that represent customers' deposits that are settled on a central bank reserve on a shared distributed ledger.

The project will be conducted in a test environment using only simulated data.

While many central banks are developing or considering developing retail central bank digital currencies, which are forms of digital money for use by the public, many are also testing wholesale CBDCs, which are fiat money in token form for exchange among financial institutions to improve existing clearing and settlement processes.

Read more: Singapore's MAS Starts Wholesale CBDC Project Ubin+ for Cross-Border Payments