Ever since the Managing Director of the International Monetary Fund (IMF) Christine Lagarde spoke out about the benefits of central bank digital currencies this November at the Fintech Festival in Singapore, many cryptocurrency enthusiasts have been speculating about the appearance of a 'Fedcoin'.
Lagarde had said that blockchain technology is 'safe, cheap, and potentially semi-anonymous, and that central banks could benefit from using cryptocurrencies as they might help supply money to the digital economy.
'All financial institutions should seriously consider exploring the feasibility of issuing their own virtual currency', she said.
'Various central banks around the world are already seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.'
Researcher at the Federal Reserve bank of St. Louis, Aleksander Berentsen and his colleague, Fabian Schar, said that it was relatively easy for central banks to create their own cryptocurrency.
'We argue that there is a large unmet demand for a liquid asset that allows households and firms to save outside of the private financial sector', they said.
'Central banks could offer such an asset by simply allowing households and firms to open accounts with them.'
However, they went on to say 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 reputational risk would simply be too high. Think of a hypothetical "Fedcoin" used by a drug cartel to launder money or a terrorist organization to acquire weapons.'
Through their research they could conclude that a 'central bank will not issue cryptocurrencies in the sense of a truly decentralized and permissionless asset that allows users to remain anonymous.'
'In general, we don't think that a central bank should be in the business to satisfy the demand for anonymous payments. We welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.'
The Federal Reserve drops Fedcoin idea. According to Aleksander Berentsen and Fabian Schar, researchers at the St. Louis Fed, “[T]he key characteristics of cryptocurrencies are a red flag for central banks.” https://t.co/bZR675MNlE via @qz— 🌊⚡Roy Gil ⚡🌊 (@CryptoRG13) December 30, 2018