US Federal Reserve Will Not Be Launching Its Own Cryptocurrency

Although the idea of a strong, reputed institution like The Fed launching its own cryptocurrency sounds promising, researchers on the inside do not seem to agree with that. Two research fellows from the Reserve Bank of St. Louis have stated in their research paper that a centralized bank having a decentralized currency is a “naïve idea.

Aleksander Barentsen and Fabian Schar, two research fellows at the Federal Reserve Bank of St. Louis have recently published a co-authored paper that explains how easy it is for central banks to create their own decentralized cryptocurrency.

In the paper titled “The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies”, however, they argue that digital currencies and central banks have a fundamental difference in the way they work, making it a less-than-ideal project for the bank to undertake. For example, while cryptocurrencies thrive in anonymity, it is imperative for central banks to let the identities of the people involved in financial transactions be known publicly, for law enforcement purposes.

Additionally, a central bank’s major role as trying to control financial crimes through the means of illicit drug trafficking, money laundering, and financing terrorists requires constant cooperation with local and state law enforcement agencies and the exchange of data regarding transactions. If such a bank starts a permission-less, Blockchain based digital currency, then it would not be easy to access this data regarding transactions. In other words, it’s a public relations (and financial) disaster on a national scale waiting to happen.

The research paper says that a central bank is more likely to launch something similar to a centrally controlled form of electronic money, instead of decentralized peer-to-peer (P2P) money transfer system. Moreover, due to their volatile nature, they make a questionable medium-of-exchange (MoE), or a good store-of-value (SoV) for the bank.

Earlier this year, a Governor of The Federal Reserve Board, Lael Brainard took a critical stance against central bank digital currencies (CBCDs) at the Decoding Digital Currency Conference in San Francisco. Although impressed by the speed and efficiency that Blockchain brought to many systems that implemented it, she said that CBCDs will not be very useful as virtual currencies due to their volatile nature.

It seems that bankers and researchers from inside the US are saying that even though CBCDs are very easy for any bank to create, they are not a viable option due to the glaring differences in their ideologies and architecture. However, the IMF has recently encouraged all financial institutions to “seriously consider” exploring the idea of creating their own virtual currency, as a large percentage of the world’s population doesn’t have access to modern banking facilities.