Boston Fed exploring the tech, benefits, and tradeoffs of a digital dollar Boston Fed exploring the tech, benefits, and tradeoffs of a digital dollar

Project looks to keep Fed at forefront of central bank digital currency research Project looks to keep Fed at forefront of central bank digital currency research

What would it take to build a U.S.-backed digital currency that has the speed, security, privacy and resiliency needed to be money for the world’s largest economy?

That’s what a team of Federal Reserve Bank of Boston researchers is working to find out. Ultimately, their efforts will help create a hypothetical digital currency platform that will be used to better inform public policy. 

Boston Fed Assistant Vice President Robert Bench is leading the bank’s team under the direction of Senior Vice President Jim Cunha. Bench said the potential of the project is immense. 

But Bench also said the challenges are real, from anticipating the needs of the U.S. payment system 15 years down the road, to distilling copious amounts of technical knowledge to design of the prototype. He added patience may be one of the toughest things to find.

“When you’re dealing with something as high stakes as the U.S. dollar, you can’t break it,” Bench said. “Part of the great success of the U.S. technology sector has been its ability to ‘move fast and break things,’ ideally at fairly low stakes. Within something as important as the U.S. dollar, we need to move fast, but deliberately, because this is the highest possible stakes.”

U.S. prioritizes keeping pace as countries and private sector research CBDC 

Digital currency is direct central bank money (like cash) that exists only in digital form. No G20 country has fully launched a central bank digital currency, or CBDC, but China and Sweden are among those working on it. Private firms are also perfecting digital money, with Facebook’s Libra project among the best known. 

In a speech Thursday, Federal Reserve Board of Governors member Lael Brainard said the introductions of Bitcoin and other digital currencies “have raised fundamental questions about legal and regulatory safeguards, financial stability, and the role of currency in society.” 

“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding CBDC,” Brainard said.

Bench said a CBDC could offer many benefits. For instance, transferring money overseas would be cheaper, and it could also speed government transfers of money to individuals. A CBDC could also prevent private sector monopolies on digital currencies, which could have privacy implications, since – as with the internet – some companies would base their revenue models on mining user data, Bench said. And if digital currency development was left to just a few private sector entities, that could reduce resilience in the monetary system and increase risk.

Bench emphasized the hypothetical digital currency platform that’s in development is not assuming any changes to the current monetary system – there is no mandate to go to production. But he added, “As the U.S. central bank, we need to understand all the tradeoffs that could exist if we were tasked to create a digital form of the dollar. That is the core of this project: How to have the most comprehensive map of tradeoffs for the American public if we are asked to create a digital dollar.” 

Boston Fed team also focused on better understanding existing digital currency options

In parallel with its work on the hypothetical digital currency platform, the Boston Fed team is also developing robust testing and experimentation aimed at better understanding existing public and private digital currency options and their tradeoffs. 

Bench said strong support from Bank President Eric Rosengren has been critical to getting rolling, as has Cunha’s long record of pushing innovation inside the Federal Reserve System. The team is also collaborating with researchers from the Digital Currency Initiative at the Massachusetts Institute of Technology – which has unparalleled expertise in digital currencies.

Meanwhile, the new team comes from the private sector, and the bank plans to add to it during the next six months. Current members include Tyler Frederick (a capital markets expert and startup alum), Anders Brownworth (who taught MIT’s first blockchain course) and James Lovejoy (a blockchain engineer from MIT’s Digital Currency Initiative). 

All bring real expertise and energy, Bench said. And, importantly, he added, “They understand the stakes. They all understand the implications of doing it right.”

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