Issuing a Cryptocurrency by a national Central Bank is a difficult challenge, although Iceland and Ecuador already have their own. If implemented incorrectly it has the potential to cause systemic damage to the entire financial industry. The rewards are great; bottlenecks and compartmentalization within the existing system could be completely eradicated creating an internationally viable and streamline economy.

Transaction speed, cost, barriers to entry and accessibility would all be revolutionized. People worldwide could conduct their banking and financial needs in one currency with one platform, the majority of the financial system could be automated to the likes we have never seen. A central bank would operate as the issuer, the lender, the remittance service and everything in between. If the US Federal Reserve was to release Fedcoin it would completely change finance as we know it.



This proposed system would operate as a push payment network; which would give major benefits to merchants in the form of reduced fraud, increased fund security and lower fees, these benefits would in-turn be passed on to the consumer as lower prices for goods and services. Fraud (card fraud is predicted to be $10 Billion in 2015 in the US alone) would also be greatly reduced through the implementation of a cryptocurrency push payment network.

A centralized digital currency would cause decreased banking revenue; this would be realized as increased margins to retailers and follow through to lower prices for the consumer.

If such a ‘coin’ was to be created, many negatives must be addressed. Poor oversight will compromise a Central Bank’s ability to control its national currency and add systemic risks to the entire financial system, the stakes are certainly high. One of the main issues of existing cryptocurrencies is volatility. AML/KYC implementation also poses risk vs. reward tradeoffs. Monetary policy needs to be congruent with the existing currency. Another issue is that this push payment system provides no irreversibility; this is an area where further development is greatly needed. Finally, this new currency could quite quickly nationalize banking; totally absorbing the competitive private banking markets by eradicating their deposits and inturn their collateral, this is not necessarily a good thing.

The biggest benefit of a centrally issued digital currency would be the lack of volatility; this would increase consumer adoption and possible use cases.

The monetary policy of this crypto currency should be transparent and open source whist remaining centrally controlled. Any changes issued by the Central Bank should remain visible by the public for verification and trust.

Volatility could be addressed by pegging to the existing national currency; this would prevent any lower bound volatility. The upper bound volatility could be addressed in many ways, an adjustable rate of issuance, adjustable blockchain’s or a pre-mine. I believe a centrally issued digital currency should be pre-mined; this prevents any upper bound volatility by giving the Central Bank unlimited issuance power and absolute control being the sole issuer, this would also be a useful tool towards transaction irreversibility. Mining would be conducted by the central bank only; verification of this mining could still be done independently to ensure system integrity.

AML/KYC would be covered under existing laws; any acquisition of national cryptocurrency would require a bank account. Transactions after this point would be stored in the blockchain and verifiable for the purposes of taxation, accounting and law enforcement. The currencies protocol would have to allow for future changes, but this would only be precautionary. This cryptocurrency would operate like cash; supply would be determined by free markets. In the event of a ‘zero-lower bound’ problem, the interest rates on the central cryptocurrency could be adjusted by a hard fork to the protocol.

The advantages of a cryptocurrency issued by a Central Bank greatly outweigh the disadvantages. Research has already been conducted by the St Louis Federal Reserve Bank and came to the conclusion that that a central cryptocurrency should be created. This would be a good thing for bitcoin; it would hasten mainstream adoption and the creation of the much-needed infrastructure. It would leave the consumer with a choice, transact in a centrally controlled currency or a decentralized alternative. Each has their benefits and drawbacks, it will ultimately be up to the user to determine which cryptocurrency they trust more.

References:

Andolfatto, David. ‘Macromania: Fedcoin: On The Desirability Of A Government Cryptocurrency’. Andolfatto.blogspot.com.au. N.p., 2015. Web. 8 Mar. 2015.

Koning, JP. ‘Moneyness: Fedcoin’. Jpkoning.blogspot.com.au. N.p., 2014. Web. 7 Mar. 2015.

Szmigielski, Albert. ‘Thoughts On Fedcoin – A Fed Backed Cryptocurrency’. cryptoiq.ca. N.p., 2015. Web. 7 Mar. 2015.