Should Fed start its own Fedcoin?

St. Louis Fed Vice President David Andolfatto makes a case for Fed starting its own bitcoin variant  called Fedcoin.

He says the bitcoin idea is exciting as it helps make payments much faster. The disadv is its volatility:

My own recommendation is for central banks to consider offering digital money services (possibly even a cryptocurrency) at the retail and wholesale level. There is no reason why, in principle, a central bank could not offer online accounts, the same way the U.S. Treasury presently does (www.treasurydirect.gov). These accounts would obviously not have to be insured. They would provide firms with a safe place to manage their cash without resorting to the banking or shadow banking sector. They would give monetary policy an additional instrument–the ability to pay interest on low-denomination money (possibly at a negative rate). To the extent paper money is displaced, there would be large cost savings as well.

It’s hard (for me) to see what the downsides are in having a central bank supply digital money. Critics might argue that it leaves people exposed to potentially poor monetary policy. This may be true and, for these people, currency substitutes should be available (including Bitcoin). In terms of payments, critics might argue that central bank accounts will be permissioned accounts, requiring the release of personal information, application efforts, that KYC restrictions will apply (so not censorship resistant) and so on. To address these concerns, a central bank could go one step further and issue a cryptocurrency (Fedcoin) offered at a fixed exchange rate where payments are cleared using a Bitcoin-inspired anonymous communal consensus algorithm. I don’t think we can expect anything like this in the near future, but it is technologically possible. Of course, people will complain that Fedcoin will inspire illicit trade, etc. But again, the same is true of regular central bank issued cash.

Will Luther of Cato institute obviously disagrees. He says just allow private sector to mine all these bits:

In an earlier post on the topic, Andolfatto goes even further by claiming that “the Fed is in theunique position to credibly fix the exchange rate between Fedcoin and the USD.”  And, lest one think his claim applies exclusively to Fedcoin, he clarifies that “the Fed has a comparative advantage over some private enterprise” issuing a distinct cryptocurrency “backed by USD at a fixed exchange rate.”

Although Andolfatto is right to claim that the Fed — or any central bank for that matter — has a comparative advantage in issuing substitutes that are accepted at par with its other liabilities, it is certainly not in a unique position to issue a digital, P2P (peer-to-peer or person-to-person) cryptocurrency that is accepted at par.  There are all sorts of par-valued, dollar-denominated private digital monies.  In the US, private banks issue electronic balances that exchange at par with the dollar.  There are also P2P monies that trade at par.  The notes and coins issued by a currency board are P2P (in the sense of person-to-person and that they need not be cleared by a central authority).  And, since an orthodox currency board holds sufficient reserves by definition, it will maintain par acceptance.  Private banks in Scotland and Northern Ireland issue circulating notes that exchange at par with the British pound.  Clearly, private providers are capable of supplying either a digital or P2P money that trades at par with an established official currency.

In fact, there is even today at least one dollar-based, privately-provided digital, peer-to-peercryptocurrency.  Billed as the world’s first stable digital currency, NuBits (an altcoin governed by the Nu protocol) has only deviated from its $1 par value by $0.025 or more on fourteen days — and only twice for two consecutive days — since it was launched on September 23, 2014.  In other words, NuBits are remarkably stable in terms of the dollar. 

Superb stuff..

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