How the Fed’s digital currency could replace crypto

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When the Federal Reserve holds its meeting in Jackson Hole later this month, economists will have to discuss a big experiment: Can Fed officials prepare markets for a “taper” of lax monetary policy, without trigger shock?

This matters deeply in the short term. But there is a second, longer-term debate that investors should also watch: How quickly can the Fed create an efficient digital currency for the central bank?

Last year, the Boston Fed asked MIT researchers to embark on a project to build and test “boldly [and] ingenuity “the computer systems necessary to support a digital currency backed by the United States.

This is expected to produce two policy papers next month: one covering the coding challenges of the CBDC; the second on economic and design choices, such as what putative digital dollars might mean for commercial banks.

To cryptocurrency evangelists, this may seem weak – at least at first glance. After all, as an Atlantic Council tracker notes, China is already “racing ahead” with the development of a digital yuan, while 14 other countries, including Sweden and South Korea, are pilot phase with their CBDCs. Five countries have now fully launched a digital currency, starting with the deliciously named Bahamian dollar.

The United States is the furthest behind among the four largest central banks, the tracker notes. In addition, Jay Powell, Chairman of the Fed, says explicitly that there is “no need to rush.”

And since the MIT project is isolated from core Fed operations, there are suspicions that it may just be a token gesture from a central bank under pressure to show Congress that it can evolve with the times of the 21st century. (The Boston Fed insists that the initiative’s name, “Project Hamilton,” doesn’t just honor Founding Father Alexander Hamilton, but is an equal celebration of MIT woman scientist Margaret Hamilton.)

Even if the Hamilton project is more symbolic than substantial right now, it would be a mistake to ignore it. Because if the Boston Fed is discreet about the details, some aspects of its research are already intriguing. First, Hamilton’s team isn’t just adapting existing private sector crypto technology, as the Monetary Authority of Singapore does with Ethereum, for example. Instead, he’s building an entirely new system from scratch.

Second, after the Fed publishes a white paper “that will document the ability to achieve reasonable goals with basic treatment,” it will “create an open source license for the code,” as Eric Rosengren recently promised. , Chairman of the Boston Fed. This is an unusually open approach for the Fed, to put it mildly. U.S. officials appear to be hopeful that if their code is copied it will improve it and, most importantly, give the United States more influence in setting global standards.

Third, the MIT team is focused on retail finance and is driven by the desire to find a solution for consumer digital money that is scalable, secure, fast, and flexible enough to scale over time.

It makes sense. However, these four goals raise at least a dozen conflicting issues, as clearly pointed out in a CBDC design competition currently organized by the Monetary Authority of Singapore and its partners. Can a retail CBDC system “properly track transactions, limit loss, or support the recovery of lost funds without compromising the identity of the user?” And, can a retail CBDC be “flexible but robust?” “

No private sector monetary system has yet credibly squared these circles. Neither, arguably, has a central bank, since the Bahamian Sand Dollar is a tiddler. However, if Hamilton’s white paper offers solutions, it could move privately created cryptocurrencies (like bitcoin) or stablecoins (like tether), as Powell now explains. “You wouldn’t need stable coins; you wouldn’t need cryptocurrency if you had an American digital currency, ”he recently told Congress. “I think that’s one of the strongest arguments in its favor.”

Bitcoin evangelists scoff at the fact that this seems highly unlikely to happen anytime soon, if ever, given the cumbersome nature of central bank bureaucracies. And even if the Hamilton team finds the holy grail of CBDC computer codes, the Fed would likely need congressional support to even attempt a pilot. No one knows if this would happen.

But whether you love crypto or hate crypto, its explosion has reminded us all that symbols are very important to making money – and not just memes. After all, one of the great attractions of bitcoin is precisely the way it acts as a symbol of anti-authoritarianism. If the Project Hamilton documents are credible, it will change the symbolism of the crypto world. Practices that were on the fringes of finance are becoming more widespread as the establishment tries to take control. This can make the catch-all phrase “crypto” less scary for politicians and the public.

However, it can also undermine the first-mover advantage that tokens like bitcoin have enjoyed. Indeed, this symbolic change could threaten cryptocurrencies as much, not more, than the crackdown that the Securities and Exchanges Commission threatens.

Which, of course, will provide a lot of material for debate in Jackson Hole, especially since many Fed policymakers are urged to avoid talking too much about their other current, even more tortured experience of whether their “cone Can actually work. .

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