The Blockchain and The Fed

On Thursday I went to an event at the Boston Federal Reserve Bank called “The Hype and Promise of Blockchain”, which was part of Boston’s 2016 Hub Week. As someone who has expressed interest in the Blockchain in the past, I thought it’d be interesting to hear the Fed’s (albeit just the Boston branch) take on the Blockchain.

Don Anderson, the CIO of the Boston Federal Reserve Bank, spoke for the Fed at the event. His talk mostly outlined what the Boston Federal Reserve’s responsibilities were as part of the Fed and how the Blockchain might help them do their job. Below is some of the parts of his talk I found most interesting as well as my reaction to some of it.

The Boston Federal Reserve Bank’s Responsibilities

One of the most interesting tidbits from the talk was the role that the Boston branch of the Federal Reserve plays. It’s responsible for maintaining the distributed ledger for all of the Federal Reserve banks. If you are at all familiar with what the Blockchain is, you’ll know this is a perfect match, as the Blockchain is essentially a distributed ledger over the internet.(1)

The Fed recognizes the match, which is a good first step, but seems to be very cautious with it’s approach to how it goes about utilizing the Blockchain. This is completely understanding as you wouldn’t want the Fed experimenting with the record of your personal assets.

Where the Fed sees the value in something like the Blockchain is the distributed nature of it. If there was ever a horrible event that took place physically in the US, no matter what happened here to buildings, printed money, etc. there would still be a backup record kept distributed throughout the world.

However, while the distributed nature of the Blockchain is what appeals to the Fed, it’s also the biggest reason for the Fed’s trepidation around using it. From the Fed’s perspective, not knowing or having control over everyone involved is a big risk and one they haven’t figured out how to deal with or are not willing to take.

This is a larger underlying concern that I took away from the event. What a lot of the Fed’s hesitation with the Blockchain boils down to is the government’s lack of trust in anything but itself. Despite the promise of the Blockchain not requiring trust because of how it is built, the Fed still approaches it in a manner where they need to have control over it because they don’t trust the parties involved (or as is often the case, don’t know what parties are involved) and they don’t trust the system because they didn’t create it.(2)

Other Opportunities for the Fed

Besides the natural use case of using the Blockchain as a ledger, the Fed also recognizes it’s potential in other areas. Some of the other areas the Fed is looking at using the Blockchain in are:

• Capital Markets
• Smart contracts
• Digital currency

I am not going to dive too deeply into any of these topics here but there are some interesting points of note. The first is that the Fed even recognizes the potential use cases of a technology that is very new, especially when talking about smart contracts. I was actually quite surprised to hear smart contracts (and Ethereum) even mentioned in the talk. As one could expect, there is much hesitation to do anything concrete with smart contracts since it’s so new (we are talking about the Federal government here). Though it is interesting that it has come across their radar.

Another interesting topic touched on was the usage of digital currency. Mr. Anderson mentioned that a number of countries had active projects going on today trying to create their own digital currency to potentially replace their physical one (or at least compliment it). This is a pretty powerful recognition by governments around the world that these technologies might actually benefit their citizens.(3) However, for America this comes with a caveat. It seems like other countries will be leading the way here as it was noted other countries have active projects currently underway while the US does not.

Digital currency is an obvious use case, given Bitcoin’s popularity, but again we’re talking about national governments. It is impressive to hear at least a few of them have active projects going on today.(4)

The Fed’s Concerns

All of the above is great and somewhat impressive to hear but the government is still the government and it approaches any potential risk taking with a lot of hesitation. Below is a few concerns/questions remaining about the Blockchain that the Fed outlined:

• Transparency
• Regulation
• Speed
• Transition (migration/co-existence)

Again, not going to deep dive on all of these but overall not surprising these are the questions the Fed has about the Blockchain. For anyone familiar with Bitcoin/Blockchain, speed is a question for everyone especially considering the rift it has caused in the community.

The concern that bothered me the most was regulation. I understand we are talking about the government and the government and regulation go hand in hand but it was the approach to this concern that bothered me.

Why assume regulation is needed? Why not approach it as a small experiment and see where it goes? Then decide on whether or not safe guards are needed. Rather than assuming regulation is needed and looking for a place to add it?

Conclusion

Overall, my take away from this event was it was interesting to hear the government is even considering using a new technology like the Blockchain to help it function. On the other hand, nothing said at the event was all that surprising. The Fed is using a lot of caution about how it approaches the Blockchain and other technologies like it. And most of the use cases are pretty standard and unsurprising.

What I would’ve liked to hear but didn’t at the event was the Fed considering new use cases, approaching the Blockchain as a way to do some new things, fix broken systems, etc. Alas, I assume the new uses, like in most cases, will come from the outside rather than from within.

(1) I am keeping it simple with this explanation as I am not going to dive deep into what the Blockchain is here. You can google it if curious or read more about it here or here.

(2) Hopefully this will change over time. Maybe it’s just that this technology is so new that the government truly doesn’t understand it well enough to trust it and with time it will. My surmise is that isn’t the case but going to give it the benefit of the doubt.

(3) Alright, if we are being honest with each other, my guess is governments really are interested in digital currency not because it necessarily benefits it’s citizens (which I believe it will) but because digital currency might make it easier to track the spending of certain groups/individuals. This does help them with their national security job but poses other kinds of risks as well. As they say, any technology can be used for both good and evil.

(4) One theme that I did take away from this event was governments’ recognition that these technologies are coming (and quickly) and at least trying to understand them, if not be on the forefront.