A senior researcher at the Federal Reserve Bank of St Louis has floated the idea of a government-backed 'Fedcoin' that uses a bitcoin-style protocol but the US dollar as the monetary object, combining the best of cryptocurrencies and cash.
In a recent conference presentation and blogpost, St Louis Fed director of research David Andolfatto offers qualified support for bitcoin as a "potentially promising payment system". However, he argues, as money the cryptocurrency is hamstrung by its volatility in a US economy where the unit of account is the dollar.
Andolfatto suggests that there is one body able to solve the volatility problem: government. "And so, here is where the idea of Fedcoin comes in. Imagine that the Fed, as the core developer, makes available an open-source Bitcoin-like protocol (suitably modified) called Fedcoin. The key point is this: the Fed is in the unique position to credibly fix the exchange rate between Fedcoin and the USD".
While a private body pegging bitcoin to the dollar would lead to instability, there is no such risk for Fedcoin because the issue of running out of either it or USD to maintain a fixed exchange rate poses no problem for the Fed because it can just issue whatever is needed.
From the Fed's perspective, Andolfatto writes, Fedcoin can be viewed as just another denomination, like a $10 bill, that does not inhibit monetary policy. Meanwhile, people and businesses get all the benefits of bitcoin: low cost, P2P transactions to anyone in the world. And, like cash, Fedcoin wallets would be permissionless and free, making them easy to access for everyone.
"Finally, because Fedcoin, like cash, is a "push" (rather than "pull") payment system, it affords greater security against fraud (as when someone hacks into your account and pulls money out without your knowledge)."
Because Fedcoin, unlike cash, would leave a digital trail, the new currency should be spared KYC restrictions. Writes Andolfatto: "[T[he government seems able to live with not imposing KYC on physical cash transactions--why should it insist on KYC for digital cash transactions?"
In an acknowledgement that, for many, bitcoin's popularity is rooted in its separation from the state, Andolfatto stresses that Fedcoin would not be used as a way of killing competing digital currencies, but instead merely offering an alternative option.
In a
response to the Fed man's musings, Robert Sams, who works on the Ethereum cryptocurrency project, suggests that there are bigger implications for the financial system, writing: "Fedcoin would be better than credit than US Treasury Bills. Why would anyone use bank depo (and it’s creaky array of payment systems like ACH and Swift) given such an alternative?"