Yahoo Finance
The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative have come up with an initial design for a central bank digital currency.
The theoretical coin, which was unveiled just as the Federal Reserve explores the pros and cons of adopting one – could handle 1.7 million transactions per second, and settle in under two seconds, the Boston Fed and MIT surmise.
The research initiative dubbed Project Hamilton is a multi-year collaboration between the Boston Fed and MIT’s Digital Currency Initiative that started in 2020. The project is exploring different designs that would optimize the functionality of a CBDC, which could be used in retail, e-commerce and person to person payments, among other areas.
The Hamilton initiative is separate from the Fed’s Board of Governors current evaluation of using a digital currency, which are also being studied by other global central banks. Still in early stages of research, several technical design questions remain open, which could have implications in determining whether the Fed could pursue a CBDC.
One issue the Fed is concerned about is when adopting a CBDC it could create more runs in the financial system; but if designed properly, the Fed could guard against that. Other considerations include how well it guards against cyber security, and criminal activity like hacks and money laundering, while protecting Americans’ privacy.
They are learning where certain policy and design questions can have trade offs between maximum privacy and stopping illicit crypto flows. Researchers say there could be other issues that sacrifice speed for privacy, though they are still troubleshooting.
Researchers say the core processor doesn’t need to see a lot of data – thus protecting Americans’ privacy. They are looking at a more layered design where the central processor doesn’t need to see information about users necessarily, and can still process transactions safely and securely, though “outer layers” could gain access to data, they say.
“We have technologies that can help us verify the integrity of information while at the same time not necessarily revealing what that information says,” said Neha Narula, director of the Digital Currency Initiative at MIT.
“We’ll apply techniques in the design and evaluate what can be achieved and what the trade offs are,” Narula added.
In this first phase, researchers focused on achieving goals of speed, settling payments in less than five seconds; scale, supporting transaction volumes of more than 100,000 per second and ensuring round-the-clock usability as well as security. Researchers built a processing engine that supports storing and moving CBDC in a secure manner – a foundation for creating a complete system.
A core goal was to create a flexible system that could support a variety of different banking models to have data needed to make decisions.
Researchers are testing different technologies to achieve the optimum design. While CBDC is often associated with blockchain or distributed ledger technology, it can function without relying on a digital ledger. This phase tested using blockchain and non-blockchain options, using ideas prevalent in cryptocurrency and blockchain technology to pick and choose features that optimized design.
Since the CBDC would be operating under a centralized system it doesn’t use mining or proof of stake as other decentralized systems and thus would use minimal energy — similar to the amount of electricity credit cards, Venmo or cash app would use.
If a CBDC was launched, researchers say it would need to evolve over time, and the system built must be flexible enough to handle that.
“It’s not as fixed and structured as the current banking system where you’re dealing with banks,” says Jim Cunha, Boston Fed EVP and interim COO.
Researchers are also exploring cryptographic designs for privacy, security of digital wallets in privacy and programmability. The Boston Fed says results of research will dictate the time frame of when final design blueprints could be completed.
“We want to offer more information on a regular basis, but there’s a lot of work to do here, so we could still see a couple years more of work at minimum,” Cunha said.