Project Hamilton - Building a Hypothetical Central Bank Digital Currency
The last decade has seen an explosion of digital currencies, and in recent years leading economists, central bankers, and policy makers have joined technologists and entrepreneurs in exploring this new frontier. The potential benefit and design choices of Central Bank Digital Currencies (CBDC) are being debated in conferences, white papers, and meetings across the globe. But while much is being discussed, there is little code to show for it.
The Digital Currency Initiative has completed a collaboration with the Federal Reserve Bank of Boston to develop a hypothetical CBDC. As a team dedicated to open-source software development and cryptocurrency research, DCI has been investigating the steps necessary to securely and responsibly issue a CBDC since 2016.
The promises of CBDC include cheaper payment systems and a more open, accessible economy. Central banks now have the opportunity — and the challenge — of applying the learnings from a decade of cryptocurrencies toward designing CBDCs and integrating them into our increasingly digital lives.
But they face many challenging questions, including a number of foundational technology questions that will have direct implications in how economic policy can be implemented and what functionality is even possible. What kind of system can support the scale of national retail payments while being secure and resilient to threats by state and non-state actors? What is the underlying protocol, who can access it, and how are users authenticated and protected? How might a central bank avoid exposing user data to external parties while still providing needed mechanisms to catch and deter criminal activity? DCI’s collaboration with the Fed is designed to help answer these kinds of questions. Importantly, our CBDC research is not tied to any particular technology or approach, and we are starting with a clean slate.
A CBDC is very different from existing electronic payment systems, because it is ultimately a liability on the central bank. This means the holder of CBDC does not have counterparty risk the way one does when one takes payments electronically through existing products and channels. In some designs, the holder would not be reliant upon such an institution at all to store and transfer that value, the way they do with cash. This could open up our payment systems, increasing competition, reducing costs, and spurring innovation.
The possibility of central-bank-issued digital currency represents a unique opportunity to address challenges in our existing payments system and design an economy that is more resilient, participatory, and open.
Before private-sector innovation is possible, numerous economic and public policy questions will need to be addressed and an extensive, separate policy process is required. However, this cannot be done without understanding the limits of the technology, both existing and new. Our approach is to give policy makers the information about the technology they need to make decisions, and to use policy feedback to inform our technical design.
These kinds of opportunities are best addressed through a systemic approach and in collaboration. We were honored to receive the trust of the Federal Reserve and to have worked with Jim Cunha and his team at the Federal Reserve Bank of Boston.
For DCI, this project is part of a larger CBDC initiative which combines technology research in security, privacy, and scalability with user research into the design of digital currency systems. In order to integrate user needs early in the design cycle, we worked with the research arm of Maiden Labs, which has global expertise in ethnographic discovery user research for emerging technologies. (You can see some of Maiden Labs’ other collaborations with the DCI here and here.) CBDC cannot successfully address financial exclusion and create the kind of systemic flexibility necessary to meet this century’s rapidly changing economic climate without including an understanding of user needs and behaviors early in the design. In the years ahead, DCI will be working with a full range of relevant stakeholders, including central banks, leading companies, merchants, regulators, academic researchers, and technologists to secure the network, empower users, and ensure trust in the future digital economy.
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