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Fed collaborates with MIT to develop “hypothetical digital currency”



The Federal Reserve Bank of Boston is partnering with the Massachusetts Institute of Technology to develop, test and investigate a hypothetical digital currency over a two- to three-year period.

Federal Reserve Board Governor Lael Brainard said the Fed is investigating whether a central bank digital currency (CBDC) would be safe and effective for widespread use.

“Given the important role of the dollar, it̵

7;s important for the Federal Reserve to stay on the cutting edge of CBDC research and policy development,” said Brainard of the Federal Reserve Bank of San Francisco’s Innovation Office Hours. “As part of this research, central banks are exploring the potential for innovative technologies to offer a digital equivalent of cash. Like other central banks, we continue to evaluate the opportunities and challenges, as well as the use case of a CBDC, as a complement to cash and other payment options.

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Boston Fed President Eric Rosengren said they were trying to “determine if they can meet the design requirements for a US-based central bank’s digital currency.” If the Fed ever decides to issue its own CBDC along the way, a legislative process to address all legal issues would need to take place.

“Separately, a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders,” Brainard said Thursday.

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A digital currency issued by the Federal Reserve would enter a market that is becoming more competitive all the time. Bitcoin closes at $ 12,000 and has increased more than 70% since April 1. Other cryptocurrencies such as Ethereum, XRP, Tether and Chainlink have also gained momentum.

A CBDC would essentially be a centralized, regulated version of cryptocurrencies such as Bitcoin. This is interesting because Bitcoin was originally created to bypass central banks and other traditional financial institutions.

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution,” explained Satoshi Nakamoto, the mysterious creator of Bitcoin, in the original whitepaper.

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But that is probably why central banks are trying to stay ahead of the curve for digital currencies, as stated in an essay by the Institute and the Actuary’s Faculty in the UK last year.

“Cryptocurrency challenges the traditional pillars of the financial system and against this background, CBs face the threat that individuals can store, spend and move value without relying on the fiat currency,” the researchers wrote. “This is a huge threat to the traditional role that CBs play in monetary policy and it is therefore a small surprise that there is growing momentum over developed banks to analyze and understand the potential effects of introducing a CBDC.”

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