Boston Fed’s Cunha On Building A Payments Network For The ‘Next 100 Years’

To put it mildly, these are heady times for the Federal Reserve. It’s managing the specter of inflation hovering over unprecedented government spending to manage an economy that has been disrupted by a global pandemic. Then there’s a stock market that now includes a whole new category of retail investor and SPAC and IPO activity not seen since 1999. And — perhaps most the relevant for payments — cryptocurrencies’ place in the payments ecosystem.

Fed Chairman Jerome Powell has shared his views on the latter, most recently calling cryptocurrency a “speculative asset” and remarking that he’s in “no hurry” to develop a government-issued digital dollar while also saying that cross-border payments today are inefficient.  Although Powell speaks for the Fed, it has 12 banks in its system, including The Federal Reserve Bank of Boston.

The Boston Fed has a track record of researching cutting-edge payment technologies, including its recent and well-publicized collaboration with MIT on the viability and use of blockchain and a FedCoin in reshaping the U.S. payments landscape. The Boston Fed could well become the epicenter of the U.S. policy and debate over whether and how a government-issued digital currency happens.

One of the Boston Fed’s most resonant voices is Jim Cunha’s, SVP of secure payments and FinTech. Cunha is in charge of the Boston Fed’s efforts to study blockchain technology, as well as its digital currency research efforts with MIT. Cunha admits that he’s seen it all, having been at the Fed since 1984. In a recent conversation with PYMNTS’ Karen Webster, he moved beyond the policy debates about a FedCoin to talk instead about the pros, cons and unanswered questions on the potential of digital fiat to streamline payments and fix what he describes as the “broken identity” system in the U.S.

Getting The Simple Stuff Right

So far in the initial efforts between MIT and the Boston Fed, simple questions have had a profound impact on the technology that would process these payments, noted Cunha. Among the most basic considerations are speed, throughput and resiliency.  Issuing and scaling digital fiat, he said would require interoperability between different central banks’ digital fiats and payments rails, including what’s in place today. Card networks, working with a number of crypto FinTechs, are already working together to enable a variety of cryptocurrencies, including bitcoin and USDC, to ride existing card rails, creating interoperability between legacy financial/payments systems and consumers with digital assets who want to transact using crypto.

Beyond issuing digital fiat, Cunha said, blockchain rails exist as a way to move currencies (or other constructs like contracts) with capabilities to make whatever is traveling across those rails “smart.” Ethereum, rails, he said, can set the stage for a more robust set of verification tools and “smarter” financial services to scale, in effect moving from “dumb” money to “smart” rails.

“This is actually a point of debate when you’re talking about CBDC,” Cunha explained. “Some people think CBDC should be really smart, and should even keep people from doing so-called dumb things.”

He cited, as an example, programmable instructions that could conceivably be coded to keep people from spending once their balances reach a pre-determined “low” point. But Cunha was quick to point out that the central bank digital currencies need not be coded with those instructions; rather, the software that sits on someone’s phone or bank account into which digital fiat is deposited could help them manage their money more efficiently.

“I’m not sure if a CBDC is the right place for [programmable instructions], Cunha remarked. “Given the fact that this is going to be peer-to-peer retail payments, the jury’s out in my mind.”

Addressing Intermediaries And The Underbanked

Cunha pointed to opportunities where CBDCs can be used to help unbanked and underbanked individuals and families (thirty three million individuals in the U.S. presently fit into those populations, with seven million classified as unbanked) gain access to traditional financial services. He told Webster of a scenario where, conceivably, a woman who gets her paycheck takes a cab to the check cashing service, which will take a cut of the money. But a direct CBDC payout from that employer would not require cashing a check or embracing money orders.

To be sure, that scenario bumps up against a stark reality, where innovators in the private sector have already been addressing many of these issues, including mobile check deposit with instant payouts, early-wage access programs and mobile banking apps for the underserved. Those approaches can work well, Cunha noted — but in at least some cases, new and emerging financial products are tied to prepaid cards or bank accounts.

“I’m not saying [digital fiat] is a magic bullet, but I can think of use cases where CBDC can help, especially if there’s a way of thinking about distribution,” Cunha said. “In my vision, this is not a token pointing to money. It’s not a token pointing to a bank account. It’s money.”

The distribution of digital fiat raises the inevitable question about the role of the Fed. Critics argue that distributing a FedCoin directly from the government into a consumer account will nationalize the U.S. banking system. Cunha pointed to statements by Fed Chair Jerome Powell about establishing a multi-tiered system where the Fed would work with the current banking and payments system to enable distribution and acceptance. Any new intermediary would likely be designated as a money transmitter, which could also be non-profits in the case of enabling direct payments to unbanked and underbanked consumers.

The issue of distribution, Cunha said, also raises the very real issue that’s at the core of payments — identity, particularly when doing business in a largely digital age.

“Identity is broken in the U.S.,” Cunha said. “Who are the intermediaries — and who has to worry about the identity, [the bank] or the intermediary? [The U.S.] doesn’t have a common, consistent ID scheme. But if there were a CBDC, it would be easier, because there would be something to use as the base of identity ‘work.’ It’s easier for us (the Fed) as the intermediary to do it.”

What’s Next

Next steps will become more clear when the MIT report and network model is released in July.  A big part of the effort, Cunha said, is educating regulators, policymakers, and the payments ecosystem at large about the basics of cryptocurrency, where in his experience even the concept of an account versus a token is not well-understood. The single word — cryptocurrency — is used to mean a variety of things.

Any further movement will depend on Congressional support, noted Cunha — because launching a central bank digital currency (CBDC) is an effort that sits at the intersection of technology and monetary policy.

“Whether we can actually even issue a digital currency has not been definitively determined,” said Cunha.

Regardless, Cunha said that there will be “unintended consequences” of the work, when it is finally made public and innovators see it and start building things on top of it. For him and the Fed, it’s all a net positive.

“As we move forward, we’re building something that’s going to last 100 years,” Cunha said.