The Federal Reserve Boston’s Blockchain Journey

Hyperledger Boston had a meetup (June 28, 2018) titled, “Federal Reserve of Boston – Implementation & Use Cases for FinTech”. Hosted by the Fed, it turned out to be a very interesting evening. I think all of the 40 or so attendees probably flipped the image of the Fed from “staid” to “cool” on multiple fronts. They have a head of “Strategy and Innovation”; they do “skunk works” projects; the building, plain vanilla and aloof on the outside, is well-lit and airy on the inside with “living walls” of plants and great art pieces everywhere; the staff seemed pretty hip and smart and funny. On the 4th floor, I discovered an outdoor garden, flowers blooming in well-manicured beds, looking out to the sea in front of the Boston Children’s Museum. Yes: getting in through security was an adventure and we were not allowed to stream anything. But once inside, a good evening of learning and chocolate (scattered about on the tables) ensued.

Several Fed people presented. We were first introduced to how the Federal Reserve banks represent twelve “districts”. Each is a remarkably independent entity, but all are ultimately controlled by a board of governors. Distributed ledger technology was introduced as “incredibly important” to the Fed. The reason they care (and we were told that all central banks around the world are also looking at this) is because of the impact of this disruptive technology in areas such as payment/settlement, systemic risk in Finance transactions, research into fiat cryptocurrency, bond/coin trading, credit identifiers, etc. The Boston Fed also cares very much about developing its cybersecurity expertise and ensuring that its payment policies are cognizant of the future direction of technology.

So where is the Federal Reserve of Boston today?  They have three blockchain-based proofs of concept.  Two around banking are:

  • Federal Reserve General Ledger Recording for Depository Institution reserve balances
  • Central Bank Audit

They went to great lengths to emphasize that these Proofs of Concept were just that – skunkworks projects that were not going to be implemented as “production”. No, the Fed promises “business as usual” to all banks, despite what it has just figured out.

Then there was a PoC done for HR, an internal application that they do want to take to production:

  • Employee appreciation

This is to track internal employee purchases ranging from discount tickets for theater and sports events through physical items to be had. As an internal-facing application, it will use “Internal Blockchain as a Service” and be stood up in Q1-2019.

The PoC projects started in 2013 using Etherium and then evolved to using Hyperledger Fabric, The Linux Foundation’s open source project (that IBM’s blockchain framework is built on). Why? Because of needs for a permissioned network, speed, and the robustness of membership services that Hyperledger Fabric afforded.

Using Hyperledger, the Fed’s General Ledger PoC implemented the GL as the system of record for the Fed and Depository Institutions. Some features:

  • It is the record of the balance of ownership
  • It has immutable transactions
  • There are audit trails
  • The data is shared internally and externally
  • There is continuous data sharing and reconciliation
  • There is high availability
  • There are business rules around the posting of transactions
  • The Fed publishes the balance sheet every day

The use case that the Fed first decided to implement was:

  • To transfer value between banks
  • Validate the transfer
  • Retrieve transactions based on search

This gave them an understanding of:

  • Auditability
  • Data privacy
  • Consensus verification
  • Smart contract functionality
  • Resiliency aspects
  • Robustness of programming

We were shown a live demo of the system with three banks and an audit node set up, using Hyperledger’s Node-SDK. The transactions used a simple ID, Sender, Receiver, Amount and Create Date. The History view for each bank showed the ID, Balance and Date. Go code was used with simple models and methods for JSON encoding and decoding. For sanity checks, Hyperledger Fabric’s Command Line Interface was handy.

Among the “good” lessons learned were: Hyperledger met the needs of the project. Setup was easy. The relationship between Linux Foundation and Hyperledger Working Groups was very helpful. The “bad” included: the programs are still evolving. There is a need for enterprise-caliber examples. Admin functions are still not robust. For the Federal Reserve there was the additional burden of being in a hyper-regulated environment. Using something like Amazon AWS was just not an option.

In Q3 2018, the Federal Reserve of Boston will be publishing a white paper on all this.

For those attending the meetup, the question posed as the most important one to answer, was “Is blockchain the right solution for my business problem?”

Comments followed the presentations. Some of them:

  • Hyperledger is the lowest risk option from among the blockchain frameworks.
  • If the Fed wants real time settlement, blockchain is the way to do it; eliminates human checkpoints (that’s the holy grail!).
  • Audits that take days could take minutes.
  • “Zero Knowledge Proof” blockchains are coming and they are exciting. [In ZKP, a “prover” can prove to another party, the “verifier”, that they know the value of x, without revealing any other information about x].
  • The Fed views two key pay-offs for blockchain to be Trust (auditability) and Fast Settlement.
  • The Fed’s future may be that of a “gatekeeper” rather than “payment platform”.
  • Virtual currencies can mean that there cannot be a run on the bank.
  • It is likely that there cannot be too many currencies – some may go away.
  • Value transferred is very different from value stored. Bitcoin is more like gold than a currency.

The evening gave much to think about. Plus: if even the Fed is doing blockchain, shouldn’t one be taking the plunge?

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