WASHINGTON — Senator Elizabeth Warren taught courses at Harvard about the intricate workings of the financial system, from how a simple personal check is cashed to the trading of complex securities. So when a strange new type of money called Bitcoin emerged a dozen years ago, she started paying attention — and became increasingly concerned.
She followed the wild price gyrations that have shot the value of a single bitcoin — which was worth just $1 in early 2011 — to as high as $63,000. (It was worth about half that on Friday.) She learned about the colossal energy consumption of the vast arrays of computers needed to create millions of these unique digital units of value. And she saw how Bitcoin and other cryptocurrencies were adopted by criminals and used in shadowy Internet heists, like the recent payment of millions of dollars in ransom to the hackers of the Colonial Pipeline.
But to Warren’s dismay, US officials were largely steering clear of any real oversight as crypto expanded its influence.
“There’s been a kind of run-for-cover sense among the regulators, who hope that if they just hide out long enough maybe it will go away,” Warren told the Globe. “Cryptocurrency is not going away.”
That realization has finally taken hold in Washington and led to growing support for what could be the killer app for this new private digital money — an official digital version of the dollar minted not in the Treasury but solely online.
It would be the biggest change to US currency in a century.
While much of today’s money is effectively digital — think direct deposit paychecks, credit and debit cards — using it requires a bank or payment app like Venmo to process the transaction. A digital dollar would be issued directly by the nation’s central bank, the Federal Reserve, and like cryptocurrencies would eliminate the middleman, allowing for lightning-fast check clearing, no-fee payments, and other unforeseen innovations that Neha Narula, director of MIT’s Digital Currency Initiative, recently told Congress “could do for the transfer of value what the Internet did for the transfer of information.”
The Fed is actively researching the creation of a digital dollar, and is one of dozens of central banks worldwide, including those of China, Japan, Europe, and the United Kingdom, that are exploring such a move for their currencies. The Bahamas launched the world’s first central bank digital currency in October.
Boston is ground zero for the US effort.
The Federal Reserve Bank of Boston last year joined with Narula’s team at MIT to study the technological feasibility of the move and they are set to release a report on its design and initial testing this summer, including the open-source software that would form the currency’s backbone. Two key congressional players are Warren, who chairs a Senate Banking Committee panel, and Representative Stephen Lynch of Boston, who heads the House Financial Services Committee’s task force on financial technology. Both held hearings this month on a central bank digital currency.
The development and adoption of a digital dollar still faces significant challenges, including concerns about how it would be secured and protect privacy of the people who use it. But there are early signs of momentum for a brave new world for the greenback.
The concept is drawing rare bipartisan backing in Congress, which would have to approve the creation of the new currency, boosted by a failing of the current system laid bare during the pandemic.
While most eligible Americans received government stimulus payments by direct deposit, millions of people who did not have bank accounts had to wait weeks to get paper checks or prepaid debit cards through the mail. A digital dollar could deliver the money instantly via a smartphone app that doesn’t require a bank account, or onto a card that could be loaded at retail locations.
Lawmakers are drawn to the potential to improve financial inclusion for the estimated 7 million Americans, many of them people of color, who don’t have bank accounts, and millions more with limited banking options who often turn to check cashers and other high-fee services. They also want to pursue a digital currency to keep up with China, which already is running trials of its digital yuan, so the US doesn’t fall behind its superpower rival in setting the standards for digital transactions. They see taking the dollar digital as key to maintaining its coveted role as the world’s dominant currency for international trade and financial transactions while also preserving the Fed’s control over the money supply and ability to set monetary policy.
“The light bulbs are going off at the central banks,” said Chris Giancarlo, a former federal financial regulator who now heads the Digital Dollar Project, a nonprofit encouraging research into the new currency. “They’re suddenly realizing this is a whole different architecture, and if they’re not careful, they could become like Kodak.”
The changes began in early 2009 with the launch of Bitcoin, a self-described “peer to peer electronic cash system” that eliminated the need for a bank to process transactions. Invented by the mysterious Satoshi Nakamoto, believed to be a pseudonym for a person or group, bitcoins attain their value the same way gold and other commodities do: by being rare.
Bitcoins are created by solving randomly generated and increasingly difficult cryptographic puzzles that require massive amounts of computing power. The bitcoins reside on a public ledger called a blockchain that runs on a decentralized network of computers around the world. That transparency and the technological difficulty of altering the blockchain make bitcoins secure even as the ability of people to buy and sell them using only digital identities offers the promise of privacy.
The idea of a private currency had appeal after a near meltdown of the global financial system in the fall of 2008, said Eswar Prasad, a Cornell University professor and author of the forthcoming book “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance.”
“Trust in government central banks and ... commercial banks was at a low point,” he said. “So the notion of having access to a medium of exchange that did not require a trusted third party and could provide some degree of anonymity was certainly a very alluring one.”
Bitcoin surged in popularity, spurring the creation of other cryptocurrencies, like Ether and Dogecoin, which use a similar technology. But because they’re relatively new, of limited supply, and lack any government backing, their prices are subject to huge swings. To reduce the volatility, companies like Boston-based Circle Internet Financial Ltd. have created a version of cryptocurrency known as stablecoin, whose price is tied to the value of a more stable asset like the US dollar or gold.
Facebook is developing its own stablecoin, now dubbed Diem, which would be backed by a basket of government currencies. That effort, begun in 2019, raised alarms given the social network’s size and the potential for it to mine the data of people who use the currency.
The threat of obsolescence ricocheted through the world’s staid central banks.
“If widely adopted, stablecoins could serve as the basis of an alternative payments system oriented around new private forms of money,” Federal Reserve Governor Lael Brainard warned in a May speech at a digital currency conference. She likened stablecoins to the private currencies US banks issued in the 1800s, leading to a period of fraud, bank runs, and financial instability that spurred the creation of government-backed money.
A Federal Reserve-issued digital dollar would be an even more stable version of stablecoin, one that could provide the benefits of cryptocurrency without drawbacks like volatility and a lack of consumer protection. The decentralized nature of cryptocurrency makes it tough to regulate, and US officials have only recently started focusing on it.
Proponents of studying a digital dollar believe its creation could signal the end of the road for the use of private cryptocurrencies to buy and sell things.
“Legitimate digital public money could help drive out bogus digital private money, while improving financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well designed and efficiently executed, which are two very big ifs,” Warren said at a Senate banking subcommittee hearing she chaired this month on the topic.
The effort has drawn opposition from the banking and cryptocurrency industries who see a digital dollar as a threat to their businesses. Dante Disparte, chief strategy officer of Circle, warned of the “Orwellian” prospect of having a government operating a digital currency instead of the decentralized private cryptocurrency platforms that now exist.
“Do you want to have a dollar in your wallet that can be shut off?” he said. “It’s ultimately a surveillance-state strategy versus a free market-based strategy.”
The ability to buy and sell things without divulging your identity is a hallmark of paper cash, and building that privacy into a government digital currency is a major challenge. A survey released this spring by the European Central Bank found that was by far the public’s biggest concern: 43 percent of respondents said privacy was what they wanted most from a government digital currency, followed by security at 18 percent.
“I think central banks are very, very finely attuned to the public’s concern about loss of privacy from [central bank digital currencies],” Prasad said. “The reality is anything digital is ultimately traceable.”
That became clear after the ransomware attack on the Colonial Pipeline, which caused gasoline shortages throughout the Southeastern US in May. The company reportedly paid nearly $5 million in bitcoin to the hackers. But US law enforcement officials said they were able to recover $2.3 million worth of that bitcoin by tracking the transactions and gaining access to a digital wallet.
The process, which involved a court order and digital sleuthing, was complicated but showed the limitations of cryptocurrency’s privacy.
Digital dollar transactions could be far easier for law enforcement to trace than Bitcoin, which cheers up those eager to crack down on the more shadowy corners of the cryptocurrency world but also raises fears among some privacy advocates. Digital dollar defenders say the currency could be designed with protections to hide the specifics of transactions that would only be bypassed with court orders.
“It should be possible to catch criminals without the government having a record of every date, time, amount, and location whenever I buy a cup of coffee,” Narula told lawmakers this month at a hearing by Lynch’s financial technology task force.
Brainard said in her May speech that a digital dollar “would need to both safeguard the privacy of households’ payments transactions and prevent and trace illicit activity to maintain the integrity of the financial system.”
But first, the Fed must figure out if it can build a highly secure system that could process thousands of transactions a second and be used by millions of people, the groundwork of what could be a revolutionary change in the nation’s currency.
“The era of cash, physical currency, is certainly drawing to an end,” Prasad predicted. “I think in the next three to five years, we are highly likely to see a digital version of the dollar.”
Hiawatha Bray of the Globe staff contributed to this report.
Correction: An earlier version of this story gave an incorrect title for Dante Disparte. He is chief strategy operating officer of Circle Internet Financial Ltd.
Jim Puzzanghera can be reached at email@example.com. Follow him on Twitter: @JimPuzzanghera.