Federal Reserve of St. Louis: No Reputable Central Bank Would Issue a Decentralized Virtual Currency

The Federal Reserve of St. Louis recently published a paper entitled “The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies. In brief, authors Aleksandr Berentsen and Fabian Schär don’t think much about central bank utilization of crypto. The duo states:

“No reputable central bank would issue a decentralized virtual currency.”

So there you have it.

The justification for taking such a dim view of central bank issued crypto comes down to the decentralized nature and the ability for users to remain anonymous. Two items the Federal Reserve  (and others) do not really like.

The document states that “decentralized management of ownership of digital assets is a fundamental innovation. It has the potential to disrupt the current payment infrastructure and the financial system. In general, it could affect all businesses and government agencies that are involved in record keeping.”

The authors advocate on behalf of central bank money in an electronic form that would enable consumers to hold accounts with the central bank and thus remove the need for existing commercial banks. In fact, Berentsen and Schär believe that “central bank electronic money for all increases the stability of the financial system.” Commercial banks would need to adapt and change their business model or, perhaps disappear. Deposits with commercial banks may actually need to pay competitive rates and hidden fees may disappear. A good thing for consumers.

But when it comes to the issuance of a “FedCoin” the report goes cold.

“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. Moreover, 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 under- mining any effects of this regulation by issuing an anonymous cryptocurrency with permissionless access.”

As far as these authors are concerned the concept of a FedCoin, or any other central bank crypto – is simply naive.

You may download the report here.

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