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Is the U.S. Ready for a Federal Reserve Digital Currency?
Cash may carry viruses, but computer code doesn’t. Oh, wait a minute…
Last week The Federal Reserve discussed the research they’re undertaking to better understand the risks and benefits of central bank cryptocurrencies. I suspect risk of infection, both digital and microbic, are also being reviewed. The main considerations include speed, security, privacy, and resiliency. The task they’re undertaking in conjunction with MIT over the next several years will involve intense experimentation, modeling, and creative exploration.
Background:
According to a news release from the Federal Reserve Board of Governors, The Federal Reserve Board’s Technology Lab (TechLab) has been experimenting with crypto-currency technologies. TechLab conducts research that now includes the exchange or use of existing cryptocurrencies. Their activities are designed to further the Fed’s understanding of payment technologies so they may better develop views and policies. TechLab is composed of people with varied experience in the field of exchange mediums, economics, law, information technology, and computer science.
It is the position of the Fed’s Board of Governors that it is essential, “given the (U.S.) dollars important role” that the Federal Reserve remains on the forefront of research and policy development regarding central bank digital currencies(CBDC). “Like other central banks, we are continuing to assess the opportunities and challenges of, as well as the use for, a digital currency, as a complement to cash and other payment options,” said Federal Reserve Board Governor Lael Brainard.
In addition, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology (MIT) on a multiyear effort to build a hypothetical digital currency for central bank use. This project is intended to support the Fed Board’s broader efforts in assessing safety and efficiency of digital currency systems overseen by central banks. The project with MIT is said to focus on developing an understanding of the capacities and limitations of the technologies. It is not supposed to
serve as a prototype for a Fed issued digital currency.
Federal Reserve Boston:
The Federal Reserve Bank of Boston’s multiyear collaboration with the Digital Currency Initiative at MIT will explore the use of existing and new technologies to build and test a hypothetical digital currency platform.
“We are thrilled to be working with the Digital Currency Initiative at MIT and our colleagues in the Federal Reserve System to learn the intricacies of building a CBDC platform,” said Boston Fed President and CEO Eric Rosengren. “Jim Cunha is leading our team here in Boston, and I know they are committed to researching and testing the leading technologies available to determine if they can meet the design requirements of a U.S. based central bank digital currency.”
The Boston Fed and MIT have mapped out their collaboration into work phases that extend over two to three years. The first phase involves jointly building and testing a hypothetical central bank digital currency (CBDC). The first phase objective is to determine how to develop the architecture for a scalable, accessible cryptographic platform able to meet the needs of a U.S. dollar CBDC. Design considerations include stringent requirements for speed, security, privacy, and flexibility.
In later phases, researchers will assess technology trade-offs by coding and testing various architectures, to see how they impact the CBDC’s design goals. The research results will be published jointly with MIT, and the code would be licensed as open-source software, so anyone can use or continue experimenting.
Separately the Boston Fed will evaluate other systems to better comprehend the pros and cons in supporting a CBDC.
MIT Digital Currency Initiative:
The MIT Digital Currency Initiative’s (DCI) collaboration with the Federal Reserve Bank of Boston to build a hypothetical digital currency brings additional expertise and a “laboratory” to the project.
The DCI has a lab which, according to their website, includes as their goals:
- Conduct research on blockchain and digital currency, broadly defined within two categories:
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- Core software and infrastructure development that addresses questions about security, stability, scalability, privacy, and the internal economics of these systems
- Pilot projects and other research initiatives aimed at exploring and testing applications and use cases for the technology within business, government and society at large.
- Be a neutral convener for governments, nonprofits, and the private sector to research and test concepts with high social impact.
- Foster diversity and inclusion in the development and adoption of this technology by promoting access to educational resources among a wider body of students inside and outside MIT.
- Equip students with skills to drive innovation in blockchain technology
They are at the forefront offering classes and labs in blockchain, cryptocurrencies, and markets. A short (six week) class is available online.
Take-Away
Technological innovations inspire new ways to think about money. Consistent with its role in promoting a safe, accessible, and efficient U.S. payment system, the Federal Reserve is engaging in research and experimentation with the latest payment technologies. As with most things in a rapidly changing world, methods of exchange are also in flux. Payment systems overseen by the U.S. Federal Reserve system need to be attuned to what tomorrow may bring. Researching the strengths and weaknesses in a potential digital currency in advance can help avoid any ill-informed decisions down the road.
The Federal Reserve also continues its collaboration with other central banks and international organizations as it advances their understanding of CBDCs. The acceptance of cryptocurrencies is now so widespread that top schools like MIT offer educational programs in the technology, economics, and law associated with the non-cash currency.
After reviewing the brochure for the six-week online DCI class at MIT, I learned that the online course is $2,600. It lists various payment methods. You can pay via credit card, debit card, bank deposit, or EFT. At the moment, cryptocurrency payers need not apply.
Paul Hoffman
Managing Editor
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Cryptocurrency and the Howey Test: Are They Securities?
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The Federal Reserve Bank of Boston announces collaboration with MIT to research digital currency