The Federal Reserve Bank of Boston and Massachusetts Institute of Technology’s (MIT) Digital Currency Initiative (DCI) have published initial findings of multi-stage research into central bank digital currency (CBDC) technology – including details on the successful test of digital currency architecture capable of handling 1.7 million transactions per second.
The Boston Fed and MIT’s collaboration, announced in August 2020, is a multi-year partnership dubbed ‘Project Hamilton’. It is technology-agnostic and borrowing components from blockchain and cryptocurrency systems, discarding some features of each, to build and test platforms that would give policymakers ‘substantial flexibility’ in designing how a CBDC would work.
The main goal during Project Hamilton’s first phase was to design a core transaction processor (or processing engine) for hypothetical CBDC that met the robust speed, throughput and fault tolerance requirements of a large retail payment system. With this now achieved, Project Hamilton’s second phase will explore alternative technical designs and functionality possibilities.
The overall project does not aim to create a usable CBDC and is separate exercise from the Federal Reserve Board’s ongoing evaluation of the pros and cons of a potential digital dollar, as well as a private-sector-backed research and advocacy collaboration known as the Digital Dollar Project.
“It is critical to understand how emerging technologies could support a CBDC and what challenges remain,” explained Boston Fed executive vice-president and interim chief operating officer Jim Cunha in a press release on the completion of Project Hamilton’s first phase.
Phase one: two architectures examined
One CBDC architecture tested during Project Hamilton’s first phase completed more than 99 per cent of transactions in less than two seconds (and most transactions in under 0.7 seconds). However, the ordering server resulted in a bottleneck that led to peak throughput of approximately 170,000 transactions per second.
A second architecture processed transactions on multiple computers (so did not rely on a single ordering server to prevent double spends). It was this architecture that demonstrated the headline-grabbing throughput of 1.7 million transactions per second, with 99 per cent of transactions durably completing in under a second (most transactions completed in under half a second). This resulted in superior scalability but did not ‘materialise’ an ordered history for all transactions.
In terms of their technological resilience, both architectures were able to tolerate the loss of two datacentre locations (for example, due to natural disasters or a network connectivity breakdown) while ‘seamlessly’ continuing to process transactions and without losing any data.
The research report goes on to state that CBDC design choices are ‘more granular than commonly assumed’. It describes typical CBDC design categorisations – direct, two-tier or hybrid models, with token or account-based models – as ‘insufficient to surface the complexity of choices in access, intermediation, institutional roles and data retention in CBDC design’.
Phase two: ‘many remaining challenges’
After the first phase’s focus on the feasibility and performance of relatively basic but resilient transactions, Project Hamilton is now moving into its second phase.
Research topics during the second phase could include cryptographic designs for privacy and auditability, programmability and smart contracts, offline payments, new use cases and access models, as well as ‘new tools for enacting policy’.
Those running the project are looking to collaborate with ‘other technical contributors from a variety of backgrounds’ in an open source repository, OpenCBDC (which is located on GitHub).
“There are still many remaining challenges in determining whether or how to adopt a central bank payment system for the US,” said MIT DCI’s director Neha Narula. “What is clear is that open-source software provides an important way to collaborate, experiment and implement. In addition to supporting collaboration, monetary systems benefit from transparency and verifiability, which open-source offers.”
The project owes its name to two Hamiltons: Margaret Hamilton, who was director of the Software Engineering Division of the MIT Instrumentation Laboratory, which developed on-board flight software for NASA’s Apollo programme; and Alexander Hamilton, America’s first Treasury secretary and founder of the Bank of the United States, a precursor to the Federal Reserve System.
IMF goes ‘behind the scenes’
Separately, the International Monetary Fund (IMF) has this month released a publication entitled ‘Behind the Scenes of Central Bank Digital Currency: Emerging Trends, Insights and Policy Lessons’.
The 35-page publication notes that most IMF members are ‘actively evaluating’ CBDCs although ‘only a few’ have issued CBDCs or undertaken extensive pilots or tests.
The paper studies six CBDC experiences, drawing on collaboration and exchanges with the respective central banks: Central Bank of The Bahamas (CBOB), People’s Bank of China (PBoC), Eastern Caribbean Central Bank (ECCB), Banco Central de Uruguay (BCDU), Sveriges Riksbank and Bank of Canada (BOC).
*** Central Bank of Kenya (CBK) has issued a ‘Discussion Paper on Central Bank Digital Currency’ examining the applicability of a potential CBDC in the East African nation. ‘CBDC design and the potential benefits of a Kenyan CBDC remain unclear, similar to many jurisdictions across the world’, states the 28-page consultation paper, which rounds off with 12 questions.
FURTHER READING
=>>> Global Government Fintech’s dedicated ‘Digital Currencies’ section <==
‘US Fed asks 22 questions about potential digital dollar’ – our news story (21 January) on the 40-page ‘Money and Payments: the US Dollar in the Age of Digital Transformation’ document asks for public comment on more than 20 questions about a potential US central bank digital currency (CBDC)
‘US project to kick off CBDC tests’ – our news story (5 May 2021) on the Digital Dollar Project
‘Leading central bankers urge caution on rush towards CBDCs’ – our news story (23 March 2021) on influential central bankers including US Federal Reserve chairman Jerome Powell adopting a cautious tone on CBDC during the opening session of the BIS Innovation Summit 2021
 Digital Currency Initiative){kind=link}