The Federal Reserve Bank of Boston, one of 12 regional Federal Reserve banks operating under the U.S. central bank, is evaluating more than 30 different blockchain networks to determine if they would support a digital dollar.
The Boston Fed, as it’s more commonly known, announced earlier this month it was actively testing a digital dollar – a tokenized version of the U.S. dollar – with the Massachusetts Institute of Technology’s Digital Currency Initiative. The collaboration builds on previous research efforts, and is intended to establish how a digital dollar might complement the existing greenback, said Boston Fed Senior Vice President Jim Cunha. Ultimately, the results will be published and potentially considered for an actual digital dollar, though the latter part is still years away.
“What we’re doing now really is much more thorough, much more building a platform to see whether distributed ledger can meet the needs of a U.S.-based central bank digital currency,” he said. “Can it actually function?”
The collaboration is “in its formative stages,” he said, meaning right now the two institutions are determining what the requirements are for the project and which platforms to build on.
As the work proceeds, the researchers hope to answer questions about scalability, throughput, privacy, resiliency and resistance to cyber attacks, he said.
“I would think we’re probably looking at 30 to 40 different either open source or private solutions at a very high level first, and then doing a deeper dive into a few of them, because we’re in the early stages of this, and we want to make sure we have the broadest view possible,” Cunha said.
Fed x MIT
The Boston Fed announced its formal collaboration with the DCI to test a digital dollar last week. However, the relationship between the two entities and their research into digital currencies stretch back years, Cunha said.
“Now that we are going further with our research with the Digital Currency [Initiative], we decided to get a more formal relationship with them,” he told CoinDesk.
Neha Narula, director of the DCI and a research scientist, said MIT’s lab is a neutral research institution.
Researchers on the project will implement different designs, which Narula hopes will provide concrete data and options for policymakers who are considering whether to move forward with a CBDC and what tradeoffs might exist with one model or another.
“We’re excited about this collaboration because DCI’s goal is to answer the fundamental questions necessary to determine under what circumstances a CBDC is a good idea, and how we might deploy one should a central bank decide to do so,” she said. “Working closely with one of the largest central banks in the world is incredibly helpful in terms of getting real-time input on how to frame and answer these questions.”
For the moment, the research is exploratory and focused on the technology aspects, rather than policy.
Bob Bench, assistant vice president at the Boston Fed, told CoinDesk the U.S. might have a different view on privacy or other issues than other nations do, so the research effort has to consider what privacy measures it can take, as one example.
Even basic questions such as which programming language should be used are up in the air, he said.
“These are some of the issues we’re thinking about at the core level before we even start thinking about user interface,” he said.
Cunha said the goal is to publish joint research over the next two years, to ensure anyone else looking at CBDCs can learn from the collaboration’s work.
“We hope to create an open source code base that supports multiple trade offs and will be useful to anyone who is interested in building, testing, and deploying central bank digital currency,” Narula said.
A number of factors will be considered during the research effort. Narula noted that a retail-focused CBDC would need low latency and high throughput, meaning it would need to be able to process a large number of transactions per second, while remaining secure.
Part of this mission means leveraging existing cryptographic and distributed ledger systems “that have been vetted in the real world,” she said.
“We don’t want to take some brand-new consensus algorithm or cryptographic protocol and use it for a country’s national currency,” she said.
Ensuring this digital dollar can serve un- or underbanked users is another goal, Cunha said, an initiative Narula agreed with.
It’s also important to ensure the resulting designs can be flexible, he said.
Beyond the basic questions, the Boston Fed wants to know how issues like throughput and privacy might be affected if participants are required to pass know-your-customer and anti-money laundering checks, he said.
“We’re not getting granular with this. We’re not trying to design and think about product design down to the level of ‘how would someone unbanked use this?’, we’re trying to be flexible enough to allow innovation to answer some of those problems,” he said.
Like Cunha, Bench emphasized that throughput is an important area of concern, saying whatever engine powers the CBDC would need to be able to support “the world’s largest currency’s transactions.”
Different central banks have different issues they may be concerned with, Narula said.
These are questions that may take years to resolve. Cunha said he does not expect to see anything come to production within the next two or three years.
“I would say I think a digital currency will launch inevitably, but then that’s a long time,” Cunha said. “These are decade-long paths, versus something that changes overnight.”
Years of work
The Boston Fed has been looking at distributed ledger technology since 2015 or 2016, Cunha said, and has published numerous papers on the subject. The group has also looked at similar central bank digital currency and payment efforts by other central banks, including the Monetary Authority of Singapore’s Project Ubin and Canada’s Project Jasper.
“Our goal really was to understand distributed ledgers, how it was unfolding,” he said.
This goal hasn’t changed. While private digital currency efforts like Libra and CBDC projects like China’s digital yuan may have created a bit more urgency to the Boston Fed and DCI’s work, there’s no mandate or timeline to launch a digital dollar by.
“It just creates more interest in the project,” Cunha said.
In other words, he does not see the new collaboration as being a competition between the U.S. and China, or the U.S. and the Libra Association.
“I would say as the major powers start to launch, it does get the attention of people that are thinking about this broadly and at a policy perspective,” he said.
If anything, the fact that there are now multiple efforts underway to create a mainstream-accessible cryptocurrency might just indicate that distributed ledger technology “actually may have legs,” and has the potential to be incorporated into payment and monetary systems’ infrastructure in the future.
The Boston Fed intends to publish thought leadership papers and analysis of the platforms it evaluates as part of its new Project Hamilton, in an effort to provide educational materials based on the research, he said.
The name is a nod to Alexander Hamilton, but also to Margaret Hamilton, one of the founders of software engineering and a former director of the Software Engineering Division of the MIT Instrumentation Laboratory, who worked on technology for part of the moon landing.