MIT Experts Design and Test Technical Research for a Hypothetical Central Bank Digital Currency


Working with a team from the Federal Reserve Bank of Boston, MIT experts have begun designing and testing a technical framework through which central bank digital currency (CBDC) research can be conducted in the United States. Credit: MIT News, stock image

The collaboration with the Federal Reserve Bank of Boston provides insight into how a digital currency could be developed in the future.

In collaboration with a team from the Federal Reserve Bank of Boston,[{” attribute=””>MIT experts have begun designing and testing technical research through which further examination of a Central Bank Digital Currency (CBDC) can be performed in the U.S.

The effort, known as Project Hamilton, is in an exploratory phase, and the research is not intended as a pilot or for public deployment. Instead, the researchers have explored two different approaches that could be used to process transactions, and thus could indicate the technical feasibility of a potential CBDC model. In a process involving significant design flexibility, the MIT group tested factors such as the volume and speed of transactions, and the resilience of the systems in general, among other requirements for a viable digital currency.

“The core of what we 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 payment economy at the scale of the United States,” says Neha Narula, director of MIT’s Digital Currency Initiative and a research scientist at the MIT Media Lab, who led the effort with the Boston Fed. “It is important to note that this project is not a comment on whether or not the U.S. should issue a CBDC — but work like this is vital to help determine the answer to that question. This project serves as a platform for creating and comparing more viable designs, and provides a place to experiment and collaborate on more advanced digital currency functionality.”

The researchers developed two complete sets of computing source code, or “codebases,” for the software systems. One codebase was capable of handling 1.7 million transactions per second, with 99 percent of those transactions finishing in less than a second — well above the basic benchmark of 100,000 transactions per second they sought to achieve. The other codebase was able to process about 170,000 transactions per second. That level of throughput would help finalize every transaction at a central bank, while enabling the growth of other machine-to-machine transactions — both of which would be vital to a potential CBDC.

Those findings have been released in a paper titled, “A High Performance Payment Processing System Designed for Central Bank Digital Currencies,” released by MIT and the Federal Reserve Bank of Boston. The Project Hamilton software, called OpenCBDC, has been released under an MIT open-source license as well. It is one piece of work among others being done on CBDC issues in the Federal Reserve system.

To be sure, any steps toward a digital version of currency would involve many additional policy decisions and software features that would need to be settled by the U.S. Congress and other regulatory experts. As the team points out in the paper’s executive summary, “several technical design questions remain open for investigation. The answers to these questions will have meaningful implications and consequences for what options are, or are not, available for policymakers.”

Indeed, Narula emphasizes, “The policy conversation around central bank digital currency is still in its infancy.” And in relation to that, she adds, “There are many research questions left to answer that we haven’t gotten to yet, such as the roles of intermediaries, how to promote access securely, and how to design for those who might not have smartphones or consistent internet access.”

Still, many countries are displaying interest in the concept of a CBDC: The Central Bank of the Bahamas, the Eastern Caribbean Central Bank, and the Central Bank of Nigeria have already issued CBDCs, and China is running a late-stage CBDC pilot project. The new research is a step toward a robust hypothetical CBDC model, at a scale that could be used by an economy the size of the U.S.

The Project Hamilton research collaboration between MIT and the Boston Fed began in August 2020, as an initiative to examine a hypothetical CBDC model. The work conducted so far represents phase one of the project, an evaluation of the fundamentals of transaction processing.

We believe that even before the policy discussions begin in earnest, it is important to dive deeply into the technology questions, and this research was designed with that in mind,” says Jim Cunha, executive vice president of the Federal Reserve Bank of Boston. “While policy decisions impact system design, we also believe groundbreaking research can inform policy makers on what is possible.”

A feasible option

In each of the two digital currency designs the MIT and Boston Fed teams tested, users interact with a centrally administered transaction processor, using digital wallets with individual, cryptographic signatures that authorize the movement of funds. One ledger, which keeps a complete record of transactions in the order they were processed, turned out to be the slower of the two systems. “We found that it had pretty significant bottlenecks,” Narula says.

The researchers also note that the faster system, the one processing 1.7 million transactions per second, the transaction quantity “appears to scale linearly with the addition of more servers,” which would sustain an even larger volume of activity.

The team was aware that consumer privacy would likely be an essential consideration in the design of a working U.S. digital currency, and they designed relatively streamlined systems with that issue in mind.

“We created architectures where the central bank didn’t necessarily need to see or store [much] user information,” Narula says, while noting that ultimately CBDC privacy practices would be informed by policy choices.

The question of system resilience is also essential for any CBDC. In this case, modeling by Project Hamilton researchers showed that if two major regions of the United States lost connectivity, the digital currency system could continue to operate elsewhere and would experience no data loss or system disruption.

Boston Fed officials say the work represents an important step in assessing the potential for a CBDC.

“Researching a hypothetical U.S. CBDC means you need to think about the highest possible stakes,” says Robert Bench, assistant vice president of the Boston Fed’s Secure Payments Group. “The technical stress on a theoretical future digital dollar would be immense. We are proud of the work of our team and MIT to build a processing engine that provides both the functionality and the flexibility needed to understand how money can work for decades to come.

The path to follow

As Narula points out, there remains a wide range of questions about a CBDC that should be discussed among government officials, in public policy forums, and among software engineers, to determine the viability of a central bank digital currency. and whether it could be built in a way that addresses accessibility and inclusion concerns.

Technical research can support different CBDC approaches, including direct-to-consumer models, while the government would likely need to determine whether financial institutions would also play a role. And, as Narula pointed out in testimony Last June, before the Financial Services Committee of the United States House of Representatives, approximately 36% of people in the United States who do not have a bank account also do not have a smartphone. In this and other areas, policy decisions and technological design overlap.

The release of Project Hamilton software under its open source license could help people collaborate more on CBDC research.

“It’s clearly an important way to build, implement, and potentially launch, in large part because monetary systems benefit from transparency and auditability, and open source offers both of those things,” says Narula.

The researchers involved in the Hamilton project are now continuing another phase of their research, in which they will analyze additional types of functionality related to a hypothetical digital currency. These could potentially include tools needed for both privacy and compliance, smart contract issues and many other specified uses, auditability, etc.

“There are many important design questions that have yet to be answered, and we look forward to doing more research to address these issues,” says Narula.

Reference: OpenCBDC


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