Even though they have issued strong statements against bitcoins, central banks around the world might not be averse to cryptocurrencies. The Federal Reserve recently became the latest government agency to consider the case for bitcoins.
In remarks at Rutgers University, William Dudley, president of the Federal Reserve Bank of New York, hinted at the prospect of a Fed-issued cryptocurrency in the future. “It’s really very premature to be talking about the Federal Reserve offering digital currencies, but it is something we are thinking about,” he said. (See also: More Governments Are Testing Cryptocurrencies.)
The Fed is not alone in examining the possibilities of cryptocurrencies. Sweden’s Riksbank, the world’s oldest central bank, is considering a similar initiative and has even published a paper about the experiment. And Japan may launch j-coin, a digital currency convertible on a one-to-one basis with the yen, just in time for Tokyo’s hosting of the 2020 Summer Olympics. Even the IMF is considering a coin of its own. (See also: Sweden On Track To Be The World's First Cashless Society.)
Academics have suggested two possible implementations. The first one involves disbursal of funds through accounts linked directly to the Federal Reserve. The accounts would accrue interest each time the agency revised interest rates. According to the National Bureau For Economic (NBER) paper’s authors, this approach would “foster true price stability” because it would enable implementation of monetary policy at the consumer level.
In the other method, the Federal Reserve could partner with private banks to spread cryptocurrency use. This is similar to the current mode of disbursal adopted by the government agency, in which cash and money are spread in an economic system through banks and money managers.
Why Is The Fed Interested In Cryptocurrencies?
It is not difficult to see why the Federal Reserve is interested in using cryptocurrencies. The government agency has a dual mandate of achieving price stability and maximizing employment through monetary policy.
To achieve these objectives, the agency controls money supply through banks and money managers. A cryptocurrency could maximize the system’s efficiency while minimizing negative consequences.
A report released earlier this year by the Swedish government evaluating the effectiveness of such a solution stated that an e-krona would have “limited effect” on monetary policy and financial stability.
“The Riksbank supplies the volume of banknotes and coins that the general public and the market demands," the report’s authors wrote. "They can be assumed to determine the supply of e-krona in the same way as they currently determine the supply of banknotes and coins."
There are other advantages to using cryptocurrencies. For example, Japan’s J-Coin is being designed with two objectives in mind. It will reduce Japan’s dependency on cash-based transactions as well as provide the government with valuable consumer spending data.
The move toward cryptocurrencies will also involve a change in existing regulation and possible pitfalls. For example, Sweden's Riksbank report cautions against consolidation of the financial sector among a small number of commercial participants and payment processors. “In the long run, this concentration could restrain competitiveness in the market and make society vulnerable,” the report’s authors wrote.