Fed partners with MIT-based digital currency initiative
The Fed's primary purpose is to ensure the financial stability of the US in the service of its citizens. It has been an open secret that the FED had been working on researching CBDC.
They were in stealth mode. Some indications came up during the House Finance Committee hearings on June 17. Federal Reserve chairman Jerome Powell made it clear that as CBDC is an extremely important part of the national infrastructure and under the purview of the Fed, the Fed would be in charge of the core infrastructure of CBDC.
The latest news reveal how the Fed has gone about researching and testing technologies to support a CBDC. The speech gives broad strategic direction while the note is more narrowly focused on the rationale for a central bank digital currency.
Dr. Brainard is a member of the Board of Governors of the Federal Reserve. As the chair of the Committee on Payments, Clearing and Settlements, she is the leader on CBDC research at the Fed. Brainard is also prominent in the FedNow project, which is housed at the Boston Fed.
Central Bank Digital Currency will complement cash, not replace it entirely. This was one of the central messages of the speech. CBDCs present opportunities but also risks. Risks in the form of privacy, enhanced illicit activity and financial stability. An impetus for the Fed's efforts is the possibility of widespread global adoption of Libra, which can threaten the Fed's control of monetary policy. Digital Currency Electronic Payments (DCEP) from China is much further ahead in terms of implementation. DCEP and Chinese international strategy threatens the primacy of the dollar as the international unit of account and means of payment.
Dr. Brainard also laid out the steps taken by the Fed to research and study CBDCs in this environment. A technology lab (TechLab) was established by the Federal Reserve Board (FRB)to build and test distributed ledger based solutions for CBDCs.
The TechLab is a multidisciplinary team consisting of technologists from the
Federal Reserve Banks of Cleveland, Dallas and New York supporting a policy team studying the monetary policy, financial stability and payments infrastructure through the lens of the Fed's primary purpose.
Dr. Brainard announced a partnership with MIT Digital Currency Initiative (DCI) with the Boston Fed taking the lead as the liaison with DCI. The multi-year partnership is aimed at building and testing a hypothetical CBDC. This research project will result in the open publication of results as well as the release of the resulting code base into open source.
Researching the publications and activities from the DCI is one way to get a good idea about the possible direction of the DCI-Fed collaboration. One of the prominent DCI researchers is an co-inventor and implementer of Lightning, the layer 2 bitcoin protocol.
A response to the Bank of England's blockchain paper published by the DCI contains multiple references to layer 2. Hence, layer 2 is expected to figure conspicuously in the CBDC research conducted by the DCI.