The proposal by the US government to have Fedcoin as a cryptocurrency supported by the Federal Reserve has been around for quite a while. Is this a threat to Bitcoin? In early 2015, a Federal Reserve VP guessed, “Imagine that the Fed, as the core developer, makes available an open-source Bitcoin-like protocol (suitably modified) called Fedcoin.”

Since then, the idea gained momentum especially in Europe, where Greece was witnessing financial crisis. Through its Finance Minister in a Eurocoin discussion, Greek supported the idea of a Fedcoin.

Rising Popularity

The idea of Fedcoin as a digital asset continues to acquire popularity and support from various quarters. Earlier in 2017, Joseph Stiglitz, a Nobel Prize winner and economist, said he strongly believed the US could float a digital currency to phase out the physical currency. While this could happen eventually, Stiglitz believed that “the main use of Bitcoin has been to circumvent tax authorities and regulation.” However, he supported the idea of a government-controlled digital currency.

Backing the same concept was Campbell R. Harvey of Duke University. “The technology underlying Bitcoin could fundamentally change the way we think of money,” said the finance professor at the University’s Fuqua School of Business. “It is only a matter of time before paper money is phased out,” Harvey told the Washington Post.

Digital Currency Transition

Harvey agrees that replacing physical cash with digital currency could be a step in the right direction to deter drug dealers and black marketers. With a government-controlled blockchain, all transactions will be recorded and transparent, making it difficult for criminals to operate in secrecy and launder money.

On the other side, Harvey argues that a state-owned blockchain should not provide the same level of privacy witnessed in other cryptocurrencies. The main objective of launching a government-controlled digital currency is to eliminate the anonymity associated with physical cash. Alternatively, even if the idea of Fedcoin comes to fruition, it would be easy to predict a higher level of black economy perpetuated by privacy-oriented digital assets such as Bitcoin, Ether, Litecoin, Monero, and other emerging crypto assets that provide stronger privacy.

“Despite the negative press about bitcoin being used for illegal transactions, bitcoin is not anonymous, and criminals who use it often do not understand that their transactions are being recorded,” Harvey observes. While a bitcoin address may have no link to its owner, it is possible, through bitcoin technology to remove the anonymity of the users. This is important, especially when it comes to law enforcement. For that reason, companies such as Chainalysis and Elliptic exist to provide complex tools for Blockchain network analysis. Such services could possibly trace Bitcoin transactions to their sources and expose the users.

What is Fedcoin?

Fedcoin is “a digital USD currency where the complete history of all transactions is visible to the Fed via a Fed blockchain.” This is according to a recent presentation by Harvey. The idea of the digital currency reverses the initial thought that the Blockchain technology could provide a means to escape government control.

According to Saifedean Ammous, a professor of economics at the Lebanese American University, “The importance of Bitcoin is that it makes monetary policy and payment settlement according to predetermined software, free of third-party control. This defeats the point of having a central bank, and is anathema to central banks’ mission, to control monetary policy and supervise money flows.” Ammous spoke to Bitcoin Magazine.

In his book, “The Curse of Cash,” economist Kenneth Rogoff mentions a possible, gradual phase-out of physical cash. This will leave only small-value notes and coins in circulation, as the economy switches to electronic money, which could be “a government-run version of the virtual currency Bitcoin.”

In its current state, Rogoff is not convinced about the maturity of the “potentially disruptive” technology associated with the current digital assets. However, he imagines a government-controlled cryptocurrency in a future economy. He writes, “If the private sector comes up with a much better way of doing things, the government will eventually adapt and regulate as necessary to eventually win out.”

Central Banks and Cryptocurrency

Contrary to Rogoff’s belief, Ammous offers a different opinion.

“The only thing that central banks can do with bitcoin is to accumulate it as a monetary reserve asset. At some point, central banks around the world will start asking themselves if they might be better off holding Bitcoin, with a political monetary policy, than other countries’ national currencies.”

Central banks can learn a lot from how Bitcoin operates. The use of Bitcoin and the Blockchain technology enhances transparency and displaces central control of money. According to Paolo Tasca, executive director of the University College London Center for Blockchain Technologies, “The Fedcoin idea was presented by David Andolfatto, Vice President, Federal Reserve Bank of St. Louis, at the first P2PFISY workshop that I organized in Frankfurt, 2015,” Tasca spoke to Bitcoin Magazine.

Cashless Monetary Form Not a New Idea

In the words of Tasca, “The idea of dispensing with cash in favor of the alternative, more efficient means of payments is not new. Pre-1900 utopian thinkers devoted a lot of effort to find a way to allow people to get rid of what Robert Owen called the ‘insane money-mystery.’ In more recent years, economists have also begun to study the implications of living in cashless societies, especially referring to the role of central banks and to the conduct of monetary policy.”

To this end, various governments and central banks are thinking about initiating their own editions of Fedcoin. For instance, the central bank of Sweden, Riksbank, is considering the possibility of launching a purely digital form of government-supported currency, possibly through the Distributed Ledger Technology (DLT). The proposed e-krona project would be a state-guaranteed cash complement working as a means of payment, a unit of account, and a store of value. With the idea of digital currency in the offing, it is evident that Sweden might phase out physical cash in five years.

Other Central Banks

In addition to Riksbank, other central banks are also mulling the possibility of going cashless. The technology could soon take root in Singapore, Canada, Papua New Guinea, and others. Recently, the Bank of Canada issued a research paper in which it is considering the option of adopting Bitcoin standard like the gold standard. On the same note, the Bank of Finland published a discussion paper in which it described Bitcoin as “a revolutionary, marvelous economic system.” This could be an indication that the bank is seriously thinking about the possibility of launching its own digital currency in the future. Even the central bank of China is carefully testing a cryptocurrency.

Tasca adds, “Other central banks (Bank of England, Bank of Canada and European Central Bank, among others) are studying the idea of a Central Bank Digital Currency (CBDC) as a non-ordinary monetary tool that could improve the central banks’ ability to stabilize inflation and the business cycle, and now as a new payment channel that could permit tracing the network of payments and record the payment history of each individual.”

Additionally, both Harvey and Rogoff concur that governments seem to like the idea of a national cryptocurrency because it could enhance the power of monetary policy. This could eventually lead to better management of the economy for example through enforcement of negative interest rates. As Harvey notes, if the Federal Reserve could adopt its own digital asset in future, it could be a major competitor (with far less volatility) to Bitcoin and other cryptocurrencies. “In fact, it’s not clear whether Fedcoin would want that competition, and the Fed is in a position to impose a regulatory environment that tilts the playing field,” Harvey warns.

Image from Google–The American Federal Reserve Bank

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