Why Does the Federal Reserve Fight Issuing a National Cryptocurrency?

The St. Louis Federal Reserve is unconvinced about issuing a national cryptocurrency as it has declared it a bad idea.

December 28, 2018 | AtoZ Markets – At the Singapore Fintech Festival held in November, Christine Lagarde, the director of the International Monetary Fund (IMF), spoke positively about central bank digital currencies (CBDCs). At the event, she highlighted various benefits of CBDCs, which includes financial inclusion, privacy and security.

Lagarde also touched on the fact that Bitcoin (BTC), among other cryptocurrencies are vying to be the currency of a new cashless world. With BTC’s explosive price rally in December 2017, its continued user growth, as well as development throughout 2018, it’s becoming obvious that digital currencies are here to stay.

Why Is The Fed Unconvinced About A National Cryptocurrency?

Nevertheless, others in the St. Louis Federal Reserve are in a different school of thought as they do not share Lagarde’s crypto enthusiasm. For the past two years, Fed researchers have not been enticed by either cryptocurrencies nor a national cryptocurrency.

While Fed researchers, Fabian Schar and Aleksander Berentsen wrote in February that central banks could easily create and issue their own crypto, they however warned:

“The key characteristics of cryptos 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.”

They further added that creating strict KYC (know your customer) as well as AML (anti-money laundering) regulations is imperative to preventing fraudsters, drug cartels, terrorists, and other illegal entities from abusing its free flowing-nature.

Even when implementing these regulations, however, the researchers stated that it would be hypocritical to require commercial or retail banks to display that kind of oversight if the central bank didn’t practice it first.

Are CBDCs Even Necessary?

The previously mentioned fed researchers have also observed that centralization would be required for a central bank cryptocurrency, hence, it isn’t even a cryptocurrency at all, but rather electronic money. The researchers stressed that it would be misleading to name CBDC a cryptocurrency. They wrote:

“Once we remove the decentralized nature of a cryptocurrency, not much is left of it. Digital money that is centralized and issued monopolistically by a central bank is e lectronic central bank money. It is worthwhile to mention that electronic central bank money could have been offered a long time ago. The technology for issuing virtual money in a centralized way existed long before the invention of the blockchain.”

That being the case, Fed officials do not see why it is necessary to create and then issue a national cryptocurrency or other forms of electronic money. Otherwise, they could have already done that long before the invention of Bitcoin by and other cryptocurrencies.

The decentralized nature of cryptocurrencies makes them so unique and desirable, hence, they do not require governance from any single entity.  Bitcoin, for instance, has a built-in economic issuance, it is designed to be transparent, neutral, trusted and also secure, as it provides an acceptable level of privacy.

Therefore, the world does not need a central bank cryptocurrency as it already has Bitcoin and several other altcoins that are continuously building and improving upon themselves. The Federal Reserve has already realized that these digital coins provide something central banks and governments simply can not. They concluded:

 “cryptocurrency is still a very young technology and there are large operational risks. Overall, we believe that the call for a ‘Fedcoin’ or any other central bank cryptocurrency is somewhat naïve.”

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