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Christine Lagarde, director of the International Monetary Fund, presented the case for the digital currencies of the central bank (CBDC) at the Singapore Fintech Festival in November. The CBDCs, he suggested, could improve financial inclusion, security and privacy. Lagarde has also touched on cryptocurrencies, explaining that bitcoin and its cousins are "competing for a place in the world without cash".
This apparent support has invigorated bitcoin enthusiasts, who often claim that cryptography can be used to reach many, if not all, goals that Lagarde has established. Numerous projects, such as Ripple, have arisen to reduce the cost of international remittances. And others, like Zcash and Monero, have emerged to protect their users' identities.
When the price of bitcoin exploded last year, it seemed that blockchain-based assets were destined to become the future of money and the national cryptocurrencies were just behind the corner. The technology experimented by Bitcoin even captured the imagination of senior officials, such as Kevin Warsh, a former US Federal Reserve governor who was among the nominees to become president of the Fed. In May, Warsh told the New York Times that, if had been chosen, would have allocated resources to explore "Fedcoin", a national currency based on the theoretical blockchain. In addition to potentially enhancing the transparency and efficiency of its paper predecessor, it seemed that a national crypt could give the FED access to unconventional instruments, such as negative interest rates.
But, over the past two years, as bitcoins have received traditional attention and investment, the Fed researchers have not been convinced by the arguments for a national cryptocurrency.
In February, Aleksander Berentsen and Fabian Schar, researchers at St. Louis Fed, wrote that a central bank "could easily" create their own cryptography. "However, the key features of cryptocurrencies are a red flag for central banks," they warned.
For law enforcement purposes, monitoring those who use a currency is critical, so creating a national cryptography without rigid identification requirements could call for abuse by criminals and other scammers, they explained. And it would be hypocritical to require that supervision from commercial or retail banks, if the central bank did not practice it in the first place.
More precisely, they noted, a central bank cryptocurrency is not really a crypto-currency at all. If it is not executed on a "unauthorized" network, with free nodes to join or leave as they wish, then effectively, it is only centrally managed electronic money, with an inappropriate blockchain component. "Once the decentralized nature of a cryptocurrency is removed, there is not much left."
Berensten and Schar have observed that such a centralized electronic money does not even require a blockchain. In fact, "the technology for the issue of virtual money in a centralized manner existed long before the invention of the blockchain." They concluded, "Cryptocurrency is still a very young technology and there are big operational risks, and on the whole, we believe that the request for a" Fedcoin "or any other cryptocurrency of the central bank is somewhat naive."
The fact is that Fed officials do not seem enthusiastic about a CBDC in any form, crypto or otherwise.
Indeed, in May, Lael Brainard, a governor of the Federal Reserve Council, issued a powerful rebuke by the CBDC at the Decoding Digital Currency Conference in San Francisco. While he seemed impressed by the major innovation of cryptocurrency – blockchain – he noted that price volatility limits the utility of crypto as a store of value and unit of account, and expressed concern about their vulnerability to hacks and money laundry.
In his remarks, Brainard raised concerns about international cyber attacks, identity (such as Berentsen and Schar before her) and how a national digital currency would affect retail banks, which lend to the public. In addition, he noted that in the United States today we already have electronic money, which is reasonably fast and generally reliable.
So, while the Fed he could make the US dollar in a cryptocurrency, there is no good reason to do it. And it is not clear whether the Fed should even digitize the dollar. While more and more e-money can offer benefits for management and financial inclusion, for now it is clear that for the Fed, a national "cryptocurrency" does not make much sense.
