Bitcoin

Should the Fed Create ‘FedCoin’ to Rival Bitcoin? A Former Top Official Says ‘Maybe’
If cryptocurrency and blockchain technology really are the future of money, the world’s central banks need to get involved, a former Fed governor argues.

By Neil Irwin

May 4, 2018
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Kevin Warsh in London in 2014. “It strikes me that a central bank digital currency might have a role to play,” he said Thursday night.CreditPool photo by Alastair Grant
Many enthusiasts of Bitcoin and other cryptocurrencies are motivated by deep skepticism of the central banks that control the world’s money supply.

But what if central banks themselves entered the game? What would happen if the Federal Reserve, or the European Central Bank or the Bank of Japan used blockchain technology to create their own virtual currencies? Besides, that is, having some cryptocurrency fans’ heads explode?

A former Fed governor — who was also a finalist to lead the central bank — thinks the idea deserves serious consideration.

“Most central banks have a view that these crypto-assets are clever, like guys in the garage did it and it’s kind of cool, or risky,” given the potential investor losses and widespread fraud, said Kevin Warsh, who was a governor at the Fed from 2006 to 2011 and was a top contender to become its chairman late last year when President Trump instead appointed Jerome Powell.

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If he had returned to the Fed, Mr. Warsh said, he would have appointed a team “to think about the Fed creating FedCoin, where we would bring legal activities into a digital coin.”

“Not that it would supplant and replace cash,” he said, “but it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy.”

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He added that blockchain technology, which allows reliable, decentralized record keeping of transactions, could be useful in the payment systems operated by the Fed, which enable the transfer of trillions of dollars between banks.

“It strikes me that a central bank digital currency might have a role to play there,” Mr. Warsh, who is now a distinguished visiting fellow at the Hoover Institution at Stanford, told several reporters Thursday evening.

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Some central banks are already doing work in this vein, including the Monetary Authority of Singapore and the Bank of England. And Mr. Powell acknowledged the potential applications in his confirmation hearing for the Fed chairmanship in November, saying, “We actually look at blockchain as something that may have significant applications in the wholesale payments part of the economy.”

It would be quite a twist if a technology whose most ardent fans are motivated by distrust of central banks became a key tool for those banks.

But it would address some of the concerns connected to Bitcoin and its many privately created rivals. To the degree that the value of existing cryptocurrencies fluctuates wildly, they are ill-suited as a medium of exchange. Central banks have spent hundreds of years learning how to keep the value of money stable.

And to the degree Bitcoin and the like facilitate tax evasion, money laundering and fraud, they will be a target of global law enforcement. Central banks are used to building systems that allow enforcement of those laws.

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It’s clear that central banks weighing use of blockchain technology don’t share the more anarchist impulses of some of the most die-hard cryptocurrency enthusiasts. But there may be more commonality than it might seem. As Mr. Warsh argues, if people really do believe that digital currencies in some form are the future of money, it would behoove central banks to treat them as more than a novelty.

“Congress gave the Fed a monopoly over money,” Mr. Warsh said. “And if the next generation of cryptocurrencies look more like money and less like gold — and have less volatility associated with them so they would be not just a speculative asset but could be a reliable unit of account — as a purely defensive matter I wouldn’t want somebody to take that monopoly from me.”

In other words, if cryptocurrency enthusiasts are correct that this technology could become a better way of carrying out even routine transactions, the Fed and its counterparts are the institutions that have the most to lose.

Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.”@Neil_Irwin•Facebook