Should the Fed Create ‘FedCoin’ to Rival Bitcoin? A Former Top Official Says ‘Maybe’

The New York Times | May 4, 2018
https://www.nytimes.com/2018/05/04/upshot/should-the-fed-create-fedcoin-to-rival-bitcoin-a-former-top-official-says-maybe.html

Many enthusiasts of Bitcoin and other cryptocurrencies are motivated by deep skepticism of the central banks that control the world’s money supply.

But what if central banks themselves entered the game? What would happen if the Federal Reserve, or the European Central Bank or the Bank of Japan used blockchain technology to create their own virtual currencies? Besides, that is, having some cryptocurrency fans’ heads explode?

A former Fed governor — who was also a finalist to lead the central bank — thinks the idea deserves serious consideration.

“Most central banks have a view that these crypto-assets are clever, like guys in the garage did it and it’s kind of cool, or risky,” given the potential investor losses and widespread fraud, said Kevin Warsh, who was a governor at the Fed from 2006 to 2011 and was a top contender to become its chairman late last year when President Trump instead appointed Jerome Powell.

If he had returned to the Fed, Mr. Warsh said, he would have appointed a team “to think about the Fed creating FedCoin, where we would bring legal activities into a digital coin.”

“Not that it would supplant and replace cash,” he said, “but it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy.”

He added that blockchain technology, which allows reliable, decentralized record keeping of transactions, could be useful in the payment systems operated by the Fed, which enable the transfer of trillions of dollars between banks.

“It strikes me that a central bank digital currency might have a role to play there,” Mr. Warsh, who is now a distinguished visiting fellow at the Hoover Institution at Stanford, told several reporters Thursday evening.

Some central banks are already doing work in this vein, including the Monetary Authority of Singapore and the Bank of England. And Mr. Powell acknowledged the potential applications in his confirmation hearing for the Fed chairmanship in November, saying, “We actually look at blockchain as something that may have significant applications in the wholesale payments part of the economy.”