Gillian Tett writes in the FT column on how the Boston Fed and MIT are building an entirely new CBDC platform to displace existing cryptocurrencies.
Later this month, the Federal Reserve holds its Jackson Hole meeting to discuss another big experiment: how soon can the Fed create an effective central bank digital currency (CBDC)?
The Boston Fed in 2020 asked MIT’s researchers to study how to build and test the computing systems needed to support a digital currency for the US.
As a result, we will see two policy papers next month: one on the CBDC coding challenges, the second regarding economic and design solutions of digital dollars, and what it might mean for the commercial bank industry.
For now, the US is the furthest behind among the biggest four central banks, as a tracker from the Atlantic Council notes, that China is already racing ahead with the development of a digital yuan, while above 60 central banks have been looking into CBDCs since 2014, and 14 other countries, including Sweden and South Korea, are in the pilot stage yet. Five countries have already fully launched a CBDC, starting with the Bahamian sand dollar.
Even if this initiative, named “Project Hamilton,” is more symbolic than substantive at the moment, some aspects are really intriguing.
At first, the project team is not just adapting existing private sector crypto technology, as the Monetary Authority of Singapore is doing with Ethereum, but is building an entirely new tech and financial system.
Second, the Fed will “create an open-source license for the code,” as recently said Eric Rosengren, Boston Fed president, which is a very unusual approach for the Fed. It looks like US officials are hoping that if their code is copied, it will have a greater impact on global standards.
Third, the MIT team is focused on retail finance and finding a solution for mass-market digital money that is scalable, secure, speedy, and flexible enough to evolve.
However, those raise a dozen contradictory problems. Can a retail CBDC system adequately trace transactions, limit the loss or support the recovery of lost funds without compromising user identity? And, can a retail CBDC be flexible yet robust?
The Project Hamilton CBDC solutions could displace private cryptocurrencies like Bitcoin and stablecoins like Tether. Although, nobody knows if this would be forthcoming.
As Jay Powell, Fed chair, recently told Congress, “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital US currency. I think that’s one of the stronger arguments in its favor.”
One big appeal of Bitcoin is how it acts as a symbol of anti-authoritarianism. If the Project Hamilton papers carry similar credibility, that will change the crypto world.
Financial practices marginal before now are moving into the mainstream while the establishment tries to take control over crypto. On the other hand, that may make “crypto” sound less scary to politicians and the public. Although, it may also undermine the advantages of private crypto first-movers, such as Bitcoin. That shift could threaten cryptocurrencies as much as the clampdown that the SEC is threatening.