In November earlier this year at the Singapore Fintech Festival, the International Monetary Fund (IMF) Director, Christine Lagarde made a strong case for the digital currency of central banks. Such currencies can enhance and stimulate financial inclusion, privacy and security, she added, besides touching upon the efforts made by Bitcoin (BTC) and other cryptocurrencies to find a place in the mainstream cashless world. This apparent endorsement by the chief of one of the most powerful global financial agencies reinvigorated the crypto enthusiasts, who claim that digital assets can be used to achieve many of the objectives laid out by Lagarde. For example, there are many crypto projects like Ripple which effectively reduce the remittance cost while others like Monero and Zcash provide unmatchable identification security to their users. The enthusiasm was further intensified when the crypto market especially Bitcoin zoomed to a surreal price level last year, and everyone thought that the advent of national cryptocurrencies was just around the corner.
Benefits of Fedcoin
Even the magic of Bitcoin impressed the high-level officials including Kevin Warsh, former governor of US Federal Reserve who was also a candidate for the post of Federal chairman. In an interview with the New York Times in May this year, Warsh told that if he were selected for the job, he would have provided the resources to explore the possibility of Fedcoin, a hypothetical blockchain-based cryptocurrency of US. He believed that Fedcoin would have not only enhanced the efficiency and transparency of the system but also equipped the Federal government with some unconventional tools like using negative rates of interest.
Skepticism of Fed Researchers
Despite all attention that the cryptocurrencies have got in the last two years, it seems that Fed researchers aren’t convinced about the prospects of having a national cryptocurrency. Revealing their position, Fabian Schar and Aleksander Berentsen who are researchers at St. Louis Fed, wrote that although it is not difficult for the central bank to create its own cryptocurrency, the real issue is with the characteristics of the digital coin. The researchers warned that without a strict identification system, it would be difficult for law enforcement agencies to identify and track any wrong abuse of the digital currency by criminals or fraudsters. It also doesn’t make any sense to ask retail or commercial banks to keep a record when the central bank is not doing it in the very first place.
Researchers also noted that in any case, a cryptocurrency managed by a central bank is not really a cryptocurrency. If it doesn’t allow running on a permissionless characteristic – in which anybody can join or leave the network according to their wish – then it is nothing but electronic money which is managed centrally. Researchers further elaborated that in such a case, there is no need to have a blockchain. In fact, such a procedure of issuing virtual money in a centralized manner has been in existence for a long time before the invention of cryptocurrency and blockchain technology. Schar and Berentsen concluded that there is a large operational risk associated with cryptocurrency and the technology is still in its naive stage. Overall, they believe that there is no need to have central cryptocurrency or Fedcoin for now.
Echoing the same sentiments, one of the board governors at Federal, Lael Brainard delivered a powerful rebuke to the concept of central bank digital currency at the Digital Currency Conference held in San Francisco in May earlier this year. Although she seemed to be impressed by the blockchain technology, the price volatility and vulnerability of cryptos to money laundering and hacking led her to issue rebuke for the digital currencies. She expressed her concerns about the identification issues, global cyber attacks, and the effect of digital currencies on retail banking which is involved in providing loans to the general public. She also said that the US already has electronic money which is quite reliable and fast, thereby dismissing prospects for a national cryptocurrency. Therefore, despite having the capability of making a digital US dollar, the Fed has no compelling reason to do so. To sum up, the idea of having a national cryptocurrency doesn’t make much sense for the Fed, at least for now.