Fedcoin Could Be Coming Soon, But Would It Really Challenge Bitcoin?

The idea of Fedcoin,” a cryptocurrency sponsored by the U.S. government and managed by the Federal Reserve, has been around for quite some time. “Imagine that the Fed, as the core developer, makes available an open-source Bitcoin-like protocol (suitably modified) called Fedcoin,” a Federal Reserve VP speculated already in 2015. The idea gained traction also in Europe in connection with the financial crisis in Greece, and was notably discussed in a “Eurocoin” context by former Greek Minister of Finance Yanis Varoufakis.

Earlier this year, Nobel Prize–winning economist Joseph Stiglitz said he believes “very strongly” that the U.S. could and should move to a digital currency and get rid of physical currency. While Stiglitz is persuaded that “the main use of bitcoin has been to circumvent tax authorities and regulation,” he appeared to be in favor of digital currency technology for government.

Fedcoin Could Be Coming Soon, But Would It Really Challenge Bitcoin?
Fedcoin Could Be Coming Soon, But Would It Really Challenge Bitcoin?

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

Phasing out physical cash — the reserve of drug dealers and black marketers — would be one of the main advantages of a national cryptocurrency, according to Harvey, since it would make it far more difficult for criminals to hide and launder money if all transactions could be recorded on the government’s blockchain.

The potential for privacy isn’t considered a desirable feature for state-owned cryptocurrencies. On the contrary, as Harvey argues, the introduction of digital currencies would be partly motivated by the desire to eliminate the anonymity of cash. On the other hand, even in a future Fedcoin-like, all-electronic economy, it’s easy to predict that there would be a strong black economy on the side, powered by privacy-oriented cryptocurrencies, including bitcoin, ether, Monero and other emerging alternatives able to offer 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,” notes Harvey. In fact, while a Bitcoin address isn’t explicitly associated with its owner, blockchain network analysis can often de-anonymize Bitcoin users. To support law enforcement, companies like Chainalysis and Elliptic offer sophisticated blockchain network analysis tools and services to trace Bitcoin transactions back to their participants and de-anonymize users.

In a recent presentation, Harvey defined Fedcoin as “a digital USD currency where the complete history of all transactions is visible to the Fed via a Fed blockchain.” That blockchain technology, initially thought of as a libertarian means to escape government control, could become a killer app for governments to have complete control over the citizens, and enforce compliance and tax collection, seems surreal to say the least.

Indeed, as Saifedean Ammous, an economics professor at the Lebanese American University, told Bitcoin Magazine, “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.”

In the presentation, Harvey cited economist Kenneth Rogoff’s 2016 book “The Curse of Cash,” which proposes to gradually phase out cash, eventually leaving only small notes and coins in circulation, and move to electronic money, perhaps “a government-run version of the virtual currency Bitcoin.”

While Rogoff is not persuaded that the “potentially disruptive” technology of today’s cryptocurrencies is sufficiently mature, he thinks a next-generation “Bitcoin 3.0” could be a precursor to a government-controlled digital currency. “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,” says Rogoff.

Ammous disagrees with this sort of argument. “The only thing central banks can do with Bitcoin is 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 its apolitical monetary policy, than other countries’ national currencies.”

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