Efi Chalikopoulou illustration of Gillian Tett column ‘How the Fed’s digital currency could displace crypto’
© Efi Chalikopoulou

When the Federal Reserve holds its Jackson Hole meeting later this month, economists will need to discuss one big experiment: can Fed officials prepare markets for a “taper” of loose monetary policy, without sparking a shock?

This matters deeply in the short term. But there is a second, longer-term debate which investors should also watch: how soon can the Fed create an effective central bank digital currency?

Last year the Boston Fed asked researchers at MIT to embark on a project to build and test “with boldness [and] ingenuity” the computing systems needed to support a US-backed digital currency.

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

To cryptocurrency evangelists, that is apt to sound feeble — at least at first glance. After all, as a tracker from the Atlantic Council notes, China is already “racing ahead” with development of a digital yuan, while 14 other countries, including Sweden and South Korea, are in the pilot stage with their CBDCs. Five countries have now fully launched a digital currency, starting with the delightfully named Bahamian sand dollar.

The US is furthest behind among the biggest four central banks, the tracker notes. Moreover, Jay Powell, Fed chair, explicitly says there is no “need to rush”.

And since the MIT project is ringfenced from core Fed operations, there are suspicions this may be mere zeitgeisty tokenism from a central bank under pressure to show Congress that it can move with the 21st century times. (The Boston Fed insists that the initiative’s name, “Project Hamilton”, does not merely honour the founding father Alexander Hamilton, but is an equal celebration of a female MIT scientist, Margaret Hamilton.)

Even if Project Hamilton is more symbolic than substantive just now, it would be a mistake to ignore it. For while the Boston Fed is tight-lipped about details, some aspects of its research are already intriguing. First, the Hamilton team is not just adapting existing private sector crypto technology — as the Monetary Authority of Singapore is doing with ethereum, say. Instead it is building an entirely new system from scratch.

Second, after the Fed releases a white paper “that will document the ability to meet reasonable goals with core processing”, it will “create an open source licence for the code”, as Eric Rosengren, Boston Fed president, recently pledged. This is an unusually open approach for the Fed, to put it mildly. US officials appear to hope that if their code is copied, it will improve it and — most crucially — give the US more influence over global standard setting.

Third, the MIT team is focused on retail finance and driven by a desire to find a solution for mass-market digital money that is scaleable, secure, speedy and flexible enough to evolve over time.

That makes sense. However, those four goals raise at least a dozen contradictory problems, as pithily outlined in a CBDC design competition currently being run by the Monetary Authority of Singapore and partners. Can a retail CBDC system “adequately trace transactions, limit the loss or support the recovery of lost funds without compromising user identity?” And, can a retail CBDC be “flexible yet robust?”

No private sector money system has squared those circles yet in a credible way. Nor, arguably, has a central bank, given that the Bahamas sand dollar is a tiddler. However, if the Hamilton white paper offers solutions, this could displace privately created cryptocurrencies (such as bitcoin) or stablecoins (like tether) as Powell now spells out. “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital US currency,” he recently told Congress. “I think that’s one of the stronger arguments in its favour.”

Bitcoin evangelists scoff that this seems most unlikely to happen soon, if ever, given the stodgy nature of central bank bureaucracies. And even if the Hamilton team finds the holy grail of CBDC computer codes, the Fed would probably need congressional support to even attempt a pilot. Nobody knows if this would be forthcoming.

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But whether you love or hate crypto, its explosion has reminded us all that symbols matter deeply in money making — and not just memes. One big appeal of bitcoin, after all, is precisely how it acts as a symbol of anti-authoritarianism. If the Project Hamilton papers carry credibility, that will change the symbolism of the crypto world. Practices that were on the financial fringe are moving into the mainstream as the establishment tries to wrest control. That may make the catch-all phrase “crypto” sound less scary to politicians and the public.

However, it may also undermine the first-mover advantage that tokens like bitcoin have enjoyed. Indeed, that symbolic shift could threaten cryptocurrencies as much, not more, than the clampdown that the Securities and Exchanges Commission is threatening.

Which, of course, will provide plenty of material for debate at Jackson Hole, particularly given that many Fed policymakers have an incentive to avoid talking too much about their other, even more tortured, current experiment, namely whether their “taper” can actually work.

gillian.tett@ft.com





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