21 October 2017

Fed researcher sets out vision for government cryptocurrency

06 February 2015  |  20509 views  |  5 Bitcoin

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?"

Comments: (5)

Paul Williams
Paul Williams - Blocksmiths - Dublin | 06 February, 2015, 16:25

So basically what the man is proposing is that the u.s. $ becomes a pegged side-chain to Bitcoin....that's fine with me ;)

i.e. [Pegged sidechain](http://www.blockstream.com/sidechains.pdf)

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Chris Yaldezian
Chris Yaldezian - IBM (Software Group) - San Ramon | 06 February, 2015, 19:53

Hummm, interesting idea. It should be debated.

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Brett King
Brett King - Moven - New York | 07 February, 2015, 18:05

Canada already did this with Mint Chip. Our failed because they didn't have the ability to influence payment mechanics. 

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A Finextra member
A Finextra member | 07 February, 2015, 19:08

Indeed the FED would like to keep matters checked as far as new money creation is concerned; still, both issues 'of running out of either it (Fedcoin) or USD to maintain a fixed exchange rate poses no problem for the Fed because it can just issue whatever is needed' and 'Fedcoin, unlike cash, would leave a digital trail' seem rather worrysome from a free market perspective, albeit unavoidable in the future.

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Tom Hay
Tom Hay - Icon Solutions Ltd - London | 08 February, 2015, 08:03

This would solve the US Faster Payments problem at a stroke. Fedcoin payments would be almost instantaneous and irrevocable, meeting the key requirements for Faster Payments. Requiring minimal infrastructure investment it would be hugely more cost-effective and faster to introduce than any of the options set out in the Fed's recent strategy paper. This is a great opportunity for the US to leapfrog the payments market, rather than continuing to play catch-up.

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