Imagine that you are buying a coffee. But instead of fumbling through your wallet for crumpled paper dollars or a credit card, you can tap a digital wallet app on your phone to send digital dollars to the store owner. Payment would be instant, and unlike Venmo, you wouldn’t need to go through — or even have — a private bank account. That’s the promise of a proposed new form of money called central bank digital currencies, or CBDCs.
These CDBCs would be a digital representation of a government-issued currency accessed through a system created by the government. wallet app, and many countries have probed the feasibility of this idea. The Bahamas has already launched a digital sand dollar, and China is in an advanced stage of piloting its digital yuan.
The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology announced for the first time that they are teaming up to investigate how the United States could create a central bank digital currency in 2020. Today they published the first white paper of their technological research, which they call Project Hamilton. They packaged their initial findings into a “Phase 1” program, and they make the software code of the models they developed under this program available through an MIT open-source license at GithubGenericName.
“To my knowledge, this is the first time the Fed has released code under an open source license,” Boston Fed Executive Vice President Jim Cunha said in a press call. “We thought it was important so others could learn from this work, but also so they could comment on strengths and weaknesses and contribute to the codebase itself.”
Researchers can also use this platform to collect data and compare its effectiveness against similar systems in the future.
What MIT and the Boston Fed have currently built is not yet a complete system. Rather, it is a processing engine capable of storing and moving digital currency. “The core of what we’ve built is a high-speed transaction processor for a centralized digital currency, to demonstrate the throughput, latency and resilience of a system that could support a pay-as-you-go economy. scale of the United States,” Neha Narula, director of MIT’s Digital Currency Initiative, said in a Press release. “This draft is not a commentary on whether or not the United States should issue a CBDC… [It] serves as a platform to create and compare more viable designs, and provides a place to experiment and collaborate on more advanced digital currency features.
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Building and executing technical mockups like this could help policymakers consider what kind of model is best if and when they decide to roll out a formal central bank digital currency project. “We don’t know yet if a CBDC is the right way to go. But we believe doing neutral and responsible research is the only way to assess the questions and arrive at informed answers,” Narula said, acknowledging that while CBDCs could create a more inclusive financial system, other alternatives also exist. “Ideally, this work that we are doing will complement policy discussions.”
The Phase 1 program tested two different codebases, with two different designs that illustrate some of the trade-offs that might need to be made between scalability, privacy, and auditability. In both designs, users received digital wallets. Wallets had public keys that told funds where to go and could create cryptographic signatures to authorize payments. Wallets were used to interact with a centralized transaction processor.
In testing, the Hamilton transaction processor, a central bank replacement, stores encrypted payments, which contain value and are associated with a public key, as unspent central bank funds. When a wallet signs transactions, it destroys the funds in the sender’s account and creates an equivalent amount of new funds in the recipient’s account. The transaction processor validates transactions. “In this version of our work, there are no intermediaries, fees, or identities outside of public keys,” the Federal Reserve Bank of Boston explained in a statement. abstract.
[Related: A beginner’s guide to how cryptocurrencies work]
Proof of work, which Bitcoin and Ethereum use to mint new coins and validate transactions, consumes a absurdly large amount of electricity. Because Hamilton’s system is centralized, it “doesn’t need to use mining or proof-of-work, or proof-of-stake, or any of those other techniques that are used in crypto- currencies,” Narula said. “A system based on the technology we have implemented so far would consume minimal energy. We think its power consumption would be comparable to typical centralized payment processors like Credit Cards, Venmo, Zelle, or Cash App.
One design used a single ledger to record all transactions in the order in which they were processed, much like most cryptocurrency blockchains do. Committed transactions had to go through a command server that batches them, but this caused a bottleneck of 170,000 transactions per second. This design is easier to audit. However, the Fed Noted that “the storage of transaction history implies that the central transaction processor may reconstruct the transaction graph, which, in combination with other data sources, could reveal sensitive user information”.
The other design was faster and could process 1.7 million transactions per second. It processes transactions in parallel on multiple computers, and the amount of transactions can scale linearly with the addition of multiple server computers.
Both systems can still function with the loss of two data centers, the team said, taking into account unexpected events such as natural disasters or internet outages.
“Going forward, we will define a number of use cases that focus on different design and possibly policy issues,” Cunha said. Not only will this allow them to see how the system behaves when more complex components such as smart contracts and offline payments are added, but it will also allow them to understand where policy and design may conflict. “For example, if one policy objective was to maximize privacy, and the other is to stop criminal activity, that creates conflicts from a technological perspective in how you design the system.”