Fedcoin Rising

The idea of a government-sponsored digital currency has been around for quite some time. See, for example, the unconfirmed rumors reported in a March, 2013 discussion on the Bitcointalk forum titled “Fedcoin: A centrally-issued alternative to peer-to-peer currencies.”

Now U.S. economists are taking it seriously.

On February 3, David Andolfatto, Vice President of the Federal Reserve Bank of St. Louis, wrote a blog post based on a presentation he gave at the International Workshop on P2P Financial Systems 2015. The title of the blog post is “Fedcoin: On the Desirability of a Government Cryptocurrency.”

Andolfatto’s central thesis is that the government could solve the problems of digital economies as follows:

“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. [Consumers and businesses] will have all the benefits of Bitcoin – low cost, P2P transactions to anyone in the world with the appropriate wallet software and access to the internet. [I]n short, Fedcoin is essentially just like digital cash. Except in one important respect. Physical cash is still a superior technology for those who demand anonymity.”

Finextra blogger Tom Hay notes that Fedcoin contradicts the radical ideology of those Bitcoin enthusiasts who want a fully P2P economy not centrally controlled by the state. But from a government perspective it’s an interesting idea, because it links the stability of fiat currency to the speed and convenience of the Bitcoin technical platform. He adds:

“Ecuador has already launched a government-backed digital currency pegged to the U.S. dollar. [T]he Ecuadorian system is not based on the blockchain, and indeed Ecuador has banned Bitcoin and altcoins, but the Philippines are considering issuing a blockchain-based e-peso. The idea of digital fiat currency clearly has legs.”

So is the rise of FedCoin inevitable?

The film “The Rise and Rise of Bitcoin” is a fascinating recap of the rebellious history of Bitcoin since its inception in 2009 all the way to the Mt. Gox fall and the arrest of Charlie Shrem in early 2014. The film tells a typical Internet story of idealistic hackers who want to change the world and their unstoppable rise… until the big boys take notice.

Those old enough to remember their “Internet moment” of enthusiastic awe for the newborn Internet in the early 90s – yes, it will change the world so fast – remember also the rest of the story: from a plaything of geeks and techno-libertarian anonymous dreamers (a famous 1993 New Yorker cartoon observed that “On the Internet, nobody knows you’re a dog”), the Internet quickly became a tool of Big Capital and Big Government.

Today, old-timers use Facebook like everyone else, but know that everything we say and do online is monitored by governments and businesses all the time. We know that, short of taking pro-level privacy measures, there is no way to escape online surveillance. Today the Internet, like it or not, belongs to the establishment.

Perhaps it’s naïve to think that exactly the same thing won’t happen to Bitcoin.

The main appeal of Bitcoin for the original Libertarian and anarchist enthusiasts was the possibility of anonymous and untraceable transactions. But bitcoin transactions are traceable by-design to a bitcoin address, and anonymous only if the bitcoin address can’t be traced back to a physical person.

In practice, bitcoin transactions are easily traceable to their originators, and that’s one of the reasons governments will warm up to digital currencies. Forget using Bitcoin to escape taxes – in a state-controlled digital economy, the tax man will be able to find all your income and expenses in the blockchain.

Bitcoin transactions are faster and cheaper than traditional transactions, which is an important incentive not only for end users but for government agencies as well, as shown by the recent Bitcoin bills in Utah, New Hampshire and New York City. It seems likely that governments will try to appropriate selected aspects of digital currencies, and eliminate undesired aspects such as anonymity and volatility, to create efficient and cost-effective but fully regulated digital economies.