Latest Progress in the Fed's Digital Currency

Since 2016, Central Bank Digital Currency (CBDC) has gradually become an important subject of research and development experiments by central banks around the world. In terms of application scenarios, general CBDC is oriented to retail, online shopping, personal payment, etc., basically corresponding to cash scenarios, and is the main research direction at present. In addition, there are CBDCs such as financial institutions’ reserves.

The Federal Reserve has been cautious in its exploration of digital currencies, and has suppressed Facebook's Libra project. But it has been conducting exploration and research itself, mainly including its financial laboratory and the "Hamilton" project that authorized its Boston branch.

Note: The project name honors two people: Alexander Hamilton, the first U.S. Treasury Secretary and founder of the financial system. Margaret Hamilton, director of software engineering at the MIT Instrumentation Laboratory, was involved in software development for the Apollo program.

Hamilton Project

The "Hamilton" project is an exploratory research project by the Federal Reserve Boston Branch and the MIT Monetary Research Center.

The project is divided into two phases:

• Phase 1: Solve core issues such as high performance, reliable transactions, scalability, and privacy protection. Target 100,000 TPS, second-level confirmation, multi-region fault tolerance.
• Phase 2: Solve key issues such as auditable, programmable contracts, support for intermediary layers, attack prevention, and offline transactions.

After several years of hard work, the first phase was completed in February this year. The source code OpenCBDC was released in the form of open source software, mainly developed through C++, following the MIT open source license agreement, and the project address is mit-dci/opencbdc-tx.

Two kinds of engines were tested. The single-order node engine Atomizer (order-preserving) can reach a peak value of 170,000 TPS; the parallel execution engine 2PC (order-preserving) can reach 1.7 million TPS.

In terms of architecture, it is similar to other central bank digital currency systems, drawing on the technical characteristics of blockchain and cryptocurrencies.

• A centralized transaction structure is adopted because the central bank can provide a strong premise of trust;
• Transactions are verified by private key signature;
• The user uses the currency through the wallet client;
• Referring to the UTXO model, the spent currency will be destroyed, and then a new currency will be created;
• Transaction verification and execution are decoupled, making it easier to expand.

The project is still at an early stage and the scenarios under consideration are very limited. The author believes that there is still a long way to go before it can be used on the ground.

Several major open issues at present:

• How is identity verification implemented? This still depends on the public-private key mechanism, which can be accelerated by specific hardware.
• How to monitor anti-money laundering? This may be handled offline in an extended manner.
• How is the audit granularity of identity and transaction data achieved? The main purpose is to allow different roles to see different granularities. This can be achieved through data isolation and encryption mechanisms.
• How is the currency issued? It can be directly exchanged to individuals, or it can be authorized by secondary commercial banks (the latter is adopted by the digital renminbi).
• How to integrate with the existing financial system? You can go through the transaction gateway, or simply not get through first, and go separately.

Summary

In fact, objectively speaking, under the premise of a centralized architecture, it is not difficult to implement a high-throughput trading system by using the existing software and hardware system. The difficulty is to support complex financial services, multi-transaction associations, and scalability, while taking into account conflicting requirements such as compliance, auditability, and privacy protection. These often require a lot of hands-on experience.