The U.S. Federal Reserve Bank of Boston partnered with the Massachusetts Institute of Technology to jointly research central bank digital currencies, highlighting a race against other central banks across the globe to innovate.
The multiyear agreement will explore using existing and new technologies to build a hypothetical digital dollar, with an initial focus on jointly building a prototype platform, said Eric Rosengren, the president and CEO of the Federal Reserve Bank of Boston, on Thursday.
Also on Thursday, Fed Governor Lael Brainard said in a webcast that the central bank remains undecided on issuing its own digital currency, even as countries such as China push aggressively to replace fiat money with a virtual one.
“The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and [central bank digital currencies] around the globe,” she said during a virtual conference hosted by the San Francisco Fed.
The Boston Fed’s collaboration with MIT will be structured into work phases extending over two to three years, the Fed said. The first of these will involve building and testing a hypothetical central bank digital currency with a focus on scalability and accessibility.
Any potential cryptographic platform designed by the team will be aimed at meeting “stringent design requirements” for speed, security, privacy and resiliency, the Fed said.
In later phases, researchers will weigh the trade-offs of different designs for a hypothetical digital dollar system. Any code that is developed through this process will be licensed as open-source software that can be used by anyone.
Concurrent to these phases, the Boston Fed will continue its own study on the benefits and risks of issuing a central bank digital currency of its own, the bank said.
“These efforts are intended to ensure that we fully understand the potential as well as the associated risks and possible unintended consequences that new technologies present in the payments arena,” Brainard said.
Making its research publicly available will help the Fed in its efforts to boost collaboration between nations, Brainard said, which she believes is necessary to address certain global issues such as money laundering and cross-border payments.
The agreement follows years of “in-house experiments” at the Boston Fed, which include a collaboration with the Federal Reserve Board’s Technology Lab, which has built and tested distributed ledger platforms to understand their associated risks, Brainard said.
It’s important that the Fed gives full weight of consideration to a variety of risks involved with cryptocurrencies, from cybersecurity to equity of digital fund distribution, Brainard added.
For example, she said, a cyberattack on digital dollar infrastructures in one jurisdiction could quickly stress the domestic financial system as well as other economies that are linked, thereby potentially eroding trust in the system.
Brainard’s comments and the Fed’s indecision both echo concerns about accessibility raised in a policy insight released last month by the Kansas City Fed.
The bank noted that 45% of U.S. households that do not have a bank account also lack consistent Internet access, which means that a digital currency will also require an offline option to be truly inclusive.
“CBDCs have the potential to address several financial and payments issues, such as improving the efficiency and resilience of the payments system,” the banks said, “but a CBDC designed to improve one outcome may not necessarily improve all of the others.”
--Additional reporting by Zack Fishman