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Is There a Fedcoin in Your Future?

Is There a Fedcoin in Your Future?

As more of everyday life moves to cyberspace, it’s not surprising that cryptocurrencies like bitcoin, a global, borderless currency, have come into being. Now there’s increasing chatter about the possibility of the Federal Reserve getting in on the action with a so-called Fedcoin, digital money that would be exchangeable on par with real dollars that works much like bitcoin. Sounds interesting indeed.

Bitcoin runs on a decentralized, peer-to-peer network, with no human intervention possible. This means there are no banks, no expensive rent, no employees, or international financial organizations at its core, just direct point-to-point transactions from anywhere to anywhere in the world. If you go on bitcoin.com you find what it says is bitcoin’s advantage. "U.S. dollars and other paper currencies are credits issued by a single nation. Their strength lies in the strength of the nation that controls them. Bitcoin’s strength lies in its mathematical design. Its open nature eliminates the need for trust. When nations print more money, their currencies get weaker. In bitcoin, nobody can just decide to increase the amount, including the creator of bitcoin. Bitcoin is more like gold than cash."

So what if Uncle Sam joins the fray?

The case for Fedcoin

"There is a need for widespread adoption of technology like Fedcoin. We have unacceptable levels of monetary friction today because only approved financial institutions are able to transmit money. End users of the currency must open ‘accounts’ with these institutions in order to participate, and there is no universal standard for transmitting money between these financial institutions globally, and even standards in the same country vary widely," says Will Madden, CEO and founder of Novauri, a digital cash purchase and sale service involved in bitcoin since 2010.

These facts, combined with a complicated global regulatory framework, are why we suffer from unacceptably high fees when sending money overseas or between banks, he says.

"Fedcoin technology could, if properly designed, eliminate this friction entirely and allow anyone interested to essentially ‘download a bank’," says Madden.

there would be added security for users of Fedcoin because it is designed for digital use

Fedcoin has advantages says Avra Liakounakos, an associate consultant at Capco a business and technology consultancy. "It eliminates transaction costs, creating a more efficient form of payment. There’s no exchange rate risk, since it would be part of the money supply. There is also less systemic risk in the economy since ownership is not an IOU from a bank (like your bank account balance), and there would be more liquidity in the economy."

Another plus, points out Baseem Mahdi, chief strategist for TechMonegy, a technology consulting firm, is that there would be added security for users of Fedcoin because it is designed for digital use. "Fiat currency was never designed to be cashless, Banks currently use security systems that are inadequate. Fedcoin is based on Push (you must pay someone), not a Pull payment system (where your account can be hacked and money pulled out of it)," says Mahdi.

What are the issues and challenges?

"Regulatory incompatibility. The Bank Secrecy Act and similar regulation require anyone moving money to comply with strict sets of record keeping and monitoring requirements. These requirements exist to ensure that money is not transmitted to individuals or entities that are on sanctions or other lists for reasons considered illegal or otherwise prohibited," says Madden.

He contends that these rules and institutions that enforce them will never allow the download of an application that lets users send and receive U.S. dollars anonymously.

"There will be a requirement for users of the software to be identified first, creating a network of ID verified individuals who are allowed to transmit funds. This alone introduces cost and friction, as some entity likely a company or companies, must positively identify users of the software. There will need to be processes to revoke licenses for users that are added to lists of unapproved users. Identity thieves will create false users, and the same arms race that exists today between banks and organized criminal identity thieves will continue as it does in today’s system," says Madden.

Identity thieves will create false users, and the same arms race that exists today between banks and organized criminal identity thieves will continue

He says the requirements around ID will also make it economically unviable to let the poorest people use the Fedcoin software. "Without a consistent standard for individual ID, Fedcoin with ID requirements won’t help the world’s 2.5 billion unbanked people. Fedcoin, as proposed, fails to automate all of the complicated and often inconsistent rules that apply to financial institutions."

Mahdi says that Fedcoin doesn’t have the economic advantages that independent cryptos have. "Fedcoin is centralized in its control, ownership, issuance and creation (if miners that are independent/non banking are not tasked and rewarded with Fedcoin for transaction validation).

Furthermore, he says that Fedcoin is still subject to volatility relative to currencies (other than the U.S. dollar, which it will be pegged to), and its purchasing power. "It is likely to be subject to devaluation as the U.S. dollar continues its long term inflationary trend." Then there are privacy concerns. "Every transaction made would be permanently recorded on the blockchain," says Liakounakos. She says that ensuring that a Fedcoin is at parity with the U.S. dollar and ensuring that they cannot be hacked, stolen, or replicated are other issues.

Who stands to benefit most from Fedcoin?

"The Fed, because it would incur less costs by keeping track of the physical currency stored/destroyed every year by printing new dollars every year. The IRS, because it would have a much better record regarding people’s transactions. The banks, because they would need less capital to ‘follow the money’ and ensure transactions are safe," says Liakounakos.

Steve Kenneally, the American Bankers Association’s vice president of payments and cybersecurity, says merchants would benefit from lower transaction costs using Fedcoin in lieu of credit cards. They would also benefit from having no chargeback costs if all sales are final.

Is there any chance Fedcoin moves from fiction to reality? Says Kenneally, "Anything is possible, but this not likely in the near term. The Fed is currently working with the industry on a 18 month plan to speed implementation of faster payments in the U.S. at the end of 2016. The Fedcoin may be considered by the group, but there is little chance of a move by the Fed that is both fast and bold in the payments space.

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Anonymous | | Comment #1
I still don't understand what is a Bitcoin?
Can anyone explain it in clear, concise english?
Shorebreak | | Comment #2
Imaginary money. Place your bets.
Anonymous | | Comment #7
all money is imaginary; all that's needed for any currency to function is for everyone using it to agree - entirely in their heads - that it has X value (look how much of our lives we willingly spend scampering around in pursuit of tiny scraps of paper and metal). based on this premise alone, merchants are willing to exchange real goods for BitCoin...thereby rendering it as "real" as any other currency. as long as we all agree to harbor the same illusion, the illusion will appear real.
Anonymous | | Comment #3
The Fedcoin would be similar to the proposed trillion dollar coin, only in smaller denominations. The Federal Reserve's purchase of the trillion dollar coin would be largely analogous to the securities purchases that are part of Quantitative easing (QE), in both cases adding to the monetary base, which is the sum of currency in circulation and bank reserves.
paoli2 | | Comment #4
And what are people supposed to do with all the paper money they may have hidden in chicken coops or in underground tunnels etc. etc.? Do they have to figure out where it is and turn it in? Well if it is handled anything like everything else in "our" Federal government, those people will be in the ground with their money before they have to be concerned about it.
Anonymous | | Comment #5
Nice fantasy, there are more problems than benefits. Who would you complain to if you ID is stolen and your money wiped out. With real IDs floating around to even pay someone one dollar makes no sense to me. And then there is the conversion to dollars as a peg one for one. If the dollars goes down so your money is too. No interest, no borrowing against your deposits is another negative.
I do not see it feasible in near future and I certainly will not fall for it.
The Z
The Z | | Comment #8
The current electronic money system is already the stepping stone to Fedcoin only difference it has a name now. This is no prediction but a path way to tracking money for a long time now on a global scale. However, the chip will be fought against making the paper dollar have the value it once had; and then some by going underground.

See the government has made attempts in the past to control what the people value like alcohol and we saw where that led through the history books. Well, Fedcoin in my prediction will fail because the American people value privacy and the ability to buy what and where they want without the eyes of the government standing in with a vote.

So, with Fedcoin having the ability to be invasive will only make the paper dollar go underground creating a new set of crimes and old crimes that will not be in the best interest of people safety. The with crime, means more bodily harm and less control than the government thinks it will have. I am sorry without some check and balances to how the government controls the Fedcoin the people will find a way around it to satisfy their sense of privacy demands.

Again, great idea, but the government has a long way to go to actually making it reality. First step add some content to the the bill of rights that will allows the general tax payers the right to privacy and no intrusion of capital blockage to how the Fedcoin is spent by an individual. You block my desire for sugar you going to have an upset revolutionary war that will probably cost more than one might think.

Again, put the Fedcoin in the hands of the people with sound Federal laws that not only benefits the Federal needs but more import supports the comforts of the minds of people from feeling that government is becoming a dictatorship by going around and stripping the right to privacy and spending curb.

Yes people today want easy, but step on their toes and they will rise and fight for their right to life, liberty, and pursuit of happiness; even if it means going against a wrongly perceived wall.

The American People as a whole can rise and stomp on those who feel they have this sick desire for control and power over others. Go ahead test the people, make their day! (Hint: study American history to predict the outcome of the Fedcoin.)

In the long run, Big Brother will Never Win.
The "Z"
Anonymous | | Comment #9
The moment you use any currency HUMAN intervention has occurred. All money is make believe unless the underlying medium has intrinsic value. Gold has value in many industries, it's relatively rare and it served well, for a time, as a currency base. Look around your personal world and calculate how many actual dollars and cents you possess. Old folks, like me, may have a grand or two in greenbacks but youngsters carry Iphones and little else. They send money to each other, to/from the bank, to the grocery store and everywhere else via binary digits called bits. Duh, we all use "bit" coins of one version or another. Last, but not least, a world currency would be an abject surrender of sovereignty and the world ain't quite all that peaceful to entertain that notion. In fact, nations are rediscovering the benefits of borders, the rule of law and self-determination. It angers the lazy but that's old news we simply forgot...for awhile.
Ridethewind | | Comment #10
A really terrible idea. We don't need more government control in our lives, we need less. Having the government track every financial transaction we do is not a democracy but a total invasion of our privacy.
CHRIS CHRISTIE FAN | | Comment #11