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Crypto Weekly

Digital Dollar On the Horizon as Boston Fed Announces its Prototype Can Handle 1.7 million Transactions Per Second

In a significant step towards creating a government-backed cryptocurrency, the Federal Reserve Bank of Boston released a report about the feasibility of a central bank-backed digital dollar.

According to the white paper, the findings are promising for the viability of a digital dollar, as the research developed two different architectures for a possible central bank digital currency, which can process 17,000 transactions per second. Visa CFO, Vasant Prabhu, cited statistics showing more than 2.5 times the number of transactions Visa can handle on its network. A majority of these transactions were also settled within two seconds, a compelling result for customers of U.S. banks who often have to wait days before their fund transfers are complete.

According to Shihab Hazari, a software developer and former researcher at Ontario Tech University, performance is far superior to popular cryptocurrencies such as Bitcoin, which can handle just 7 transactions per second, and Ether, which can take 25, according to research. While developers are exploring ways to speed up these blockchains, it's unlikely that decentralized networks like Bitcoin will be able to compete with centralized networks like the one proposed by the Boston Fed and MIT.

Suppose a central bank's digital currency is successful. In that case, it is likely to be opposed by Bitcoin purists, who see Bitcoin as a way to overthrow governments' and central banks' control over money. Even crypto enthusiasts who do not subscribe to the libertarian ideology behind Bitcoin's creation might welcome a digital dollar as a sign that

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the government embraces their vision of a global economy mainly fueled by digital currencies.

In addition to the research paper, the Boston Fed and MIT plan to upload the code that powers these experimental architectures to GitHub, which hosts open-source code and enables developers around the world to provide feedback and refine the code.

Jim Cunha, Executive Vice President of the Boston Fed, said “It is crucial to understand how emerging technologies can support CBDCs and what challenges remain. Through our collaboration with MIT and our technologists, we were able to create a scalable CBDC research model that will allow us to learn more about these technologies and the choices that should be considered when designing a CBDC."

The majority of American transactions are already conducted with digital forms of money. Only 19% of all payments were made in cash in 2020, while 67% were made using digital money such as credit cards, debit cards, and bank transfers.

In many ways, central-bank digital currencies would be similar to the primarily bank-issued digital money Americans use today. The United States government backs it up, so there is no risk. Second, the use of a CBDC would enable transactions to be executed nearly instantly and at minimal cost, thus greatly reducing the cost and time involved in managing cross-border transactions.

In addition, advocates of CBDCs believe a digital dollar could enable people who are skeptical of banks to use a digital version of the Federal Reserve notes they carry in their pockets, allowing them to participate in a rapidly expanding online economy.

The Federal Reserve Board of Governors argues that if a central bank issued a digital dollar, it would be kept in the existing financial system, providing consumers with digital wallets or accounts to store digital dollars. The report stressed the importance of protecting Americans' privacy rights while maintaining a balance between this goal and "the transparency required to deter criminal activity."

Researchers at MIT and the Boston Fed identified competing priorities as a particularly difficult problem as they experimented with the technology. The white paper notes that although it may be possible to design a CBDC that retains little information about transactions, such a design makes it harder to audit transactions for accuracy or monitor them for cyberattacks.

Research is currently underway on Phase Two of the project, including further research on these issues and research on making a digital dollar interoperable with other central bank digital currencies and possibly private cryptocurrencies, like Bitcoin and Ether.

According to MIT's Digital Currency Initiative Director, Neha Narula, there are still many challenges to overcome when deciding whether or how to implement a central bank payment system. "Open-source software is a powerful way to collaborate, experiment, and implement."

In the eyes of financial regulators, a central bank digital currency would be a better alternative to popular stablecoins like Dai, Tether, and USD Coin - digital assets whose value is pegged to the U.S. dollar. Investors use these instruments to protect their funds from cryptocurrency market volatility by parking unused funds.

In November, the Biden administration issued a report on stablecoins that outlined the risks that stablecoins pose to investors and the economy, including risks associated with a so-called "run" on a stablecoin when there is doubt about the backing assets.

The value of most popular stablecoins is maintained by the promise to always exchange one token for one dollar, backed by tangible assets. According to the report, a stablecoin that loses investor confidence could trigger a "self-reinforcing cycle of redemptions and fire sales of reserve assets."

In order to mitigate these risks, the Biden administration recommended Congress pass legislation requiring stablecoins to be issued by banks insured by the Federal Deposit Insurance Corporation and supervised by federal banking regulators. In contrast, a digital dollar that is both popular and effective could enable the crypto economy to convert its tokens seamlessly into central bank money, thus reducing the need for stablecoins. 