I had the pleasure of reading a post today by David Andolfatto at the St. Louis Fed. David proposes the creation of a new monetary unit called Fedcoin. Fedcoin would maintain a value of one US Dollar, obtaining the best of both worlds, i.e. fast low cost transmission and stable value. Mr. Andolfatto has a very progressive and outspoken outlook on crypto, which I find excellent. I think Bitcoin is the mirror that all central bankers will (and should) look into for the foreseeable future. The idea (and name) of Fedcoin is not his creature(see here, referred by David). However, I think that his idea is not taken nearly far enough. And taken farther, the result might be at the same time less radical in appearance but more dramatic in its effects on the economy at large.
- Once one introduces uncle Sam’s full faith and accounting skills of the Fed, the block chain may be public, but it no longer requires any validators (e.g. miners). That would also mean a dramatic drop in the cost of running Fedcoin.
- Maintaining one ledger is in itself extremely cheap. Any two bit financial software can do it and most banks do it for peanuts. Even if the number of accounts for Fedcoin would the hundreds of millions, the cost per account and per dollar should be not higher than the most efficient money center bank’s. As Mr. Andolfatto recognizes in his post-script, there is no reason to adopt a mechanism Satoshi Nakamoto envisioned for a trustless system when the system is based on the full faith of the US. We do not need to pay for many independent verifiers at all. The cost of such a system would still be very large, no doubt, but it would be partly offset by the retirement of a good deal of paper money (not to speak of the drastic reduction in the general cost of money transmission for individuals, businesses and the government itself. Someone would have to run the numbers.
- Fedcoin would be just individual (and corporate) accounts at the Fed. It seems to me that the Fed shouldn’t needs a fig leaf to renounce KYC. Just let people open Fed personal accounts as they open any online presence and there you have it. Just add 2(3, 4, n)-factor authentication mechanisms as you see fit.
- According to David, a crypto-like infrastructure might be appropriate because the Fed would not be OK with providing non-KYCed accounts. Following his own logic, this makes no sense (to me). If the Fed is happy with people passing their (the Fed’s) notes from one anonymous hand to the other, why would they be finicky about registering transfers of ownership on a computer ledger? Also, why would the system not be permissionless? Could they not let anyone register with their Google or Yahoo email address and move money around pseudonymously?
- In that scenario, Fedcoin is just one buck, period. Why would it be a problem?
- In fact, once you give up the whole cryptocurrency pretense, Fedcoin (you could still use the name for marketing reasons) is just one a plain old dollar. The whole issue of money supply control, exchange rate stability, minting and retiring, become irrelevant. 19 Fedcoin would be the same as one Hamilton, one Lincoln, a Jefferson and two Washingtons.
- The minute Fed accounts come online, I could hear the deafening sucking sound of deposits leaving banks for them. Ironically, if the Fed blockchain is public (good or bad thing?) people and firms might maintain bank accounts only to obscure their balance sheets for privacy or competitive confidentiality reasons!
- Bitcoin may evolve into Darkcoin or something similar as its users see fit, but If Fedcoin’s ledger is public by design, I would be very uncomfortable using it for anything sensitive, such as paying for plastic surgery for my daughter or collecting my annual bonus. I think the US military would not want to pay for supplies through Fedcoin either.
- This last point itself is worth a look. With a public ledger, it would be impossible for GM to keep its industrial plans hidden from Ford Motors’ eyes. I think the right to privacy at an individual level and the legitimate confidentiality of businesses would be hard hit by a system such as this. Of course the same argument is applicable to Bitcoin, but I haven’t seen much discussion of this point anywhere.
- Banks’ business model would change overnight. Bank multiplier would tank to nearly one and the credit intermediation business would become a pure play, taking away systemic risk, dramatically reducing economies of scale and opening up for all kinds of specializations and niche industries. No longer the Fed’s arm for monetary policy and payments system, banks would have a far different position within the business food chain.
- This is the most seismic of all ripples from Mr. Andolfatto’s proposal. If it happens, look for the return of The Bank of Brooklyn Heights, The First Bird Watching Enthusiasts’ Thrift and other narrow niche savings and loans institutions. Goodbye systemic risk! Goodbye huge payment processing farms! The difference between M1 and the sum of notes + coins + Fedcoin should be minimal, since the banking system would not be able to create money by lending.
So Fedcoin is at the same time less revolutionary, since there are no byzantine generals, and a lot more far reaching, since implementing it would upend the current financial system. Indeed, I doubt that such proposal could be implemented overnight. At best, bank lobbies permitting, it could crawl in very slowly, to allow bank readjustment. It might be an interesting experiment. When I was a budding young banker a ‘few’ years ago, I loved to say that transaction banking, my line of business, was the best piece, because we had the monopoly of the payments system, in exchange for helping the central bankers manage the money supply. That has become increasingly not true as the definition of money has moved away from the one I learned from Samuelson’s textbook. Now it seems to me that an era has gone completely. Banks do not have the monopoly of the payments system and they may not be needed to help control the money supply. The payments business hasn’t disappeared, nor I think it will, but it is going to be certainly different in the new era of frictionless payments. Incidentally, Ecuador has floated the same idea. Although I have very little faith in Ecuador’s Central Bank and regulators, it would be interesting to see how the experiment proceeds there, if it takes off at all.
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