St. Louis Fed Rejects Notion of Central Bank-Issued Cryptocurrencies

source: Bitcoin News

2018. Apr. 27. 02:00

St. Louis Fed Rejects Notion of Central Bank-Issued Cryptocurrencies

The St. Louis Federal Reserve has published an essay critically evaluating the notion of cryptocurrencies that are issued by central banks. The article is highly dismissive in presenting what it describes as “the non-case for central bank cryptocurrencies,” concluding that “a central bank will not issue cryptocurrencies in the sense of a truly decentralized and permissionless asset that allows users to remain anonymous.”

Also Read: Controversy Looms Over Bithumb Coins

St. Louis Fed Argues That Cryptocurrency Comprises Unique Monetary Form

In presenting their argument, the research paper’s authors, Aleksander Berentsen and Fabian Schar, first seek to define the unique qualities of bitcoin and articulate the properties that differentiate cryptocurrencies from other monetary forms.

Berentsen and Schär argue that different monetary forms are characterized by three dimensions: representation, transaction handling, and money creation. The paper asserts that “the distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access.”

“In theory,” Berentsen and Schär assert that “a central bank could easily introduce a central bank cryptocurrency.” It is proposed that central banks “could attach additional value components to fractions of existing cryptoassets, such as Bitcoin.” The authors also suggest that “Ethereum’s ERC20 or ERC223 token standards [can] be used to create new fungible tokens that are compatible with the Ethereum blockchain’s infrastructure”, or […] “Finally, a central bank can develop a brand new blockchain.” The paper poses all “approaches are fairly straightforward to implement and would allow for the issuance of a central bank cryptocurrency on a public blockchain.”

Decentralization as Defining Quality of Cryptocurrency

Despite the many means available through which a central bank could issue a cryptocurrency, the authors state that “the key characteristics of cryptocurrencies are a red flag for central banks. That is, no reputable central bank would have an incentive to issue an anonymous virtual currency.”

The article presents several bases for the assertion that the fundamental property of cryptocurrency is at odds with the functions of central banks. Firstly, the authors argue that “The reputational risk would simply be too high,” pointing to the risk of “a hypothetical ‘Fedcoin’ used by a drug cartel to launder money or a terrorist organization to acquire weapons.”

Central Bank-Issued Cryptocurrency Unrealistic

Furthermore, Berentsen and Schär propose that “commercial banks would rightfully start asking why they have to follow KYC (‘know your customer’) and AML (‘anti-money laundering’) regulations, while the central bank is undermining any effects of this regulation by issuing an anonymous cryptocurrency with permissionless access,” adding that “Once we remove the decentralized nature of a cryptocurrency, not much is left of it.”

The article argues that a central bank-issued cryptocurrency would comprise “virtual money that is centralized and issued monopolistically by a central bank is electronic central bank money,” concluding that “calling such a centralized form of virtual money a cryptocurrency is misleading.”

Ultimately, the paper argues in favor of central banks issuing a virtual money, advocating for such to be made available to businesses and citizens.

St. Louis Federal Reserve “Welcome[s] Anonymous Cryptocurrencies”

Regarding central bank cryptocurrencies, the authors conclude that “In general, we don’t think that a central bank should be in the business to satisfy the demand for anonymous payments. We believe that such a demand can and will be perfectly satisfied by the private sector, in particular through cryptocurrencies.”

Berentsen and Schär add that “History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.”

Do you agree with Berentsen and Schär’s assertions that central bank money is fundamentally at odds with cryptocurrency as a monetary form? Share your thoughts in the comments section below!

Images courtesy of Shutterstock, Wikipedia.

Want to create your own secure cold storage paper wallet? Check our tools section.

The post St. Louis Fed Rejects Notion of Central Bank-Issued Cryptocurrencies appeared first on Bitcoin News.