WASHINGTON — While Federal Reserve officials consider whether to issue a digital US dollar, a team of Boston researchers has been developing the complex technology — borrowing from the cryptocurrency world — required to make it work.
The Federal Reserve Bank of Boston and MIT’s Digital Currency Initiative this week released the first phase of its research, including experimental open source software for a potential digital dollar platform that could process 1.7 million transactions a second.
The team noted there’s a lot more work to do in the next phase, including researching various privacy features, and stressed the digital dollar remains hypothetical until the Fed decides whether to move forward with government-backed electronic cash.
“There are still many remaining challenges in determining whether or how to adopt a central bank payment system for the United States,” said Neha Narula, director of MIT’s Digital Currency Initiative. The technological research probably will take place over the next couple years, said Jim Cunha, the Boston Fed’s executive vice president.
Fed officials in Washington continue to study a digital currency and don’t intend to act without the support of the White House and Congress, a process that also could take years. As an initial step, the Fed released a paper on Jan. 20 examining the potential benefits and risks of a government-backed digital currency and opened a four-month window for public comments.
But while the US studies the matter, other central banks around the world are moving ahead. Most notable is China, which already has rolled out a digital yuan and will tout its use as a payment system at the upcoming Beijing Olympics. Governments are considering creating digital currencies to compete with Bitcoin and other largely unregulated cryptocurrencies that have gained popularity as an alternative payment method to the traditional banking system.
Proponents of a digital dollar say it would be more stable than cryptocurrency because it would be backed by the Fed and it could offer new benefits, like the ability to send government stimulus and other payments instantly to people without bank accounts through a smartphone app or a card that could be loaded at retail locations.
US officials also have a strong interest in maintaining the dollar’s coveted role as the world’s dominant currency for international trade and financial transactions, a position it could lose if it doesn’t keep up with digital currencies being developed by China and other nations.
The Fed’s Jan. 20 paper stresses those benefits, like financial inclusion, while also highlighting potential drawbacks, including worsening financial runs on banks during crises by making it easier and quicker to convert money into central bank digital currency. The paper also cited concerns about privacy and securing the system from hackers.
Privacy features will likely be a focus of the second phase of research in Boston that began in August 2020 in a multi-year initiative called Project Hamilton. The name comes from Alexander Hamilton, the first US Treasury secretary, and Margaret Hamilton, an MIT engineer who led the NASA team that developed the software for the Apollo moon landing.
The Boston researchers are looking at ways to protect privacy and prevent criminal activity but noted that Fed officials in Washington would decide how to balance the two. A system that maximizes privacy would limit the amount of information about the user that could be valuable to law enforcement.
“The tradeoff really is how do you maximize privacy in a way that still allows you to catch the bad guys,” Cunha said.
Jim Puzzanghera can be reached at firstname.lastname@example.org. Follow him on Twitter: @JimPuzzanghera.