Boston Federal Reserve: Planning to design blockchain supervision nodes to monitor capital flows

Boston Federal Reserve is one of the earliest and most involved government agencies involved in blockchain technology. Since 2016, the state's regulators have been quietly developing blockchain systems, but it has barely disclosed any related plans.

Now, the first experiment in the Boston Federal Reserve has been rewarded, and the agency published a white paper on the proof of concept for Ethereum and Hyperledger Fabric. Paul Brassil, vice president of the Federal Reserve Information Technology Department in Boston, said the Boston Federal Reserve is ready for the next phase of work.

The team will study the possibility of establishing a “supervisory node” (a regulatory tool that can connect to various bank blockchains in the future). Jim Cunha, senior vice president of the Federal Reserve in Boston, said the node would monitor the flow of funds and settlements between different banks:

If you look at the future, there might be one blockchain that is holding securities, one that is holding derivatives, one is holding cash or interbank transfer - how do you as a supervisor watch the traffic on all these platforms that also will be on different technology?

Cunha added that the Boston Federal Reserve does not look at these explorations from a policy perspective and will work with the Fed on these rules. The monetary authorities must be able to keep up with the development of technology:

We are surrounded by very large financial institutions and banks and we know that all of them are experimenting with the blockchain technology. So the more we can work with them and understand their roadmap, the more we know that we’re moving in a right direction

The Boston Federal Reserve first set the relevant agenda to determine the main direction of the trial, and the full work will begin as early as this summer. Cunha said that there are no plans to publicly announce the project:

Right now there is very little research on it, so our next goal is to look into what an audit node look like, Cunha said. What kind of data we should have access to, how to interact, how to update nodes, can you create operational problems with it? What kind of coding you will need to do to store the information about the movement of funds, so you can do analysis of the flows. We are really starting from scratch.

Brassil said that in the future we may see multiple blockchains in different banking institutions, so the federal savings deposits should have "a wide enough technical capability to cover all platforms."

The Boston Federal Reserve began using Ethereum in 2016 to conduct related technical tests on blockchain. At the time, the agency did not have a dedicated blockchain developer, and all programmer teams had to self-learn by watching related videos on YouTube. Cunha and Brassil called this experience "basement entrepreneurship."

During this period, developers of the Boston Federal Reserve attempted to place depository institutions' balances under the blockchain supervision of the Boston Federal Reserve and plan to create simulated transactions (a back-office model supported by blockchain). They tested on the Ethernet blockchain and tested it on the Hyperledger Fabric. Finally, the Hyperledger Fabric is considered a more appropriate choice.

The reason why the Boston Federal Reserve chose Hyperledger Fabric was because, for government entities, a licensed blockchain was a better choice. Second, if you choose to use the Ethereum blockchain, continuous supply of gas may complicate regulatory tasks and limit speed.

The whitepaper states:

The time necessary to create a block was slower than could be tolerated in a production environment.

Cunha said that the blockchain back office project is now on hold and the "supervisory node" trial is underway, so the Boston Federal Reserve is hiring some professionals to strengthen the blockchain test.

We are trying to add stuff to do something more robust internally, we need more dedicated resources,” he said. The new blockchain team will not be large, though, only “a handful” of people.

In addition, the Boston Federal Reserve is actively negotiating with other monetary authorities, but Cunha and Brassil are reluctant to disclose information about these institutions. Despite this, they are very happy to share this project.

We have to share information because the whole industry needs to educate itself.