Five Things You Should Know About ‘Fedcoin’

The idea of government-created and -backed cryptocurrencies has been around since the earliest days of bitcoin (BTC). But as crypto has captured the public’s imagination over the past year, the actions and public statements of central banks around the globe are drawing greater attention from proponents and critics alike.

In May, former Federal Reserve governor Kevin Warsh, a finalist to be President Trump’s Fed chair, said he would have explored creating a so-called “fedcoin” had he been appointed.

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

One benefit of a central bank-backed cryptocurrency is its value could  be tied to a fiat currency, helping ensure a more stable measure of value that could speed its adoption.

The exact role of a fedcoin is the subject of much debate, but a few things are becoming more clear.

1. Cryptocurrencies and fiat currencies already have a lot in common.

Cryptocurrencies, critics say, have no intrinsic value beyond the perception that they will hold their value. But the same could be said for fiat currencies in a world that has left the gold standard behind.

Don’t take our word for it, that’s what a U.S. Federal Reserve Bank leader said just last month.

“Currency is an intrinsically worthless object that has value in equilibrium only because people think it will be accepted in future trades,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during Consensus 2018.

Through that lens, a fiat currency with unstable monetary policy and a cryptocurrency that forks to increase the total quantity of coins could lose credibility in similar ways.

One benefit of a central bank-backed cryptocurrency is its value could be tied to a fiat currency, helping ensure a more stable measure of value that could speed its adoption. But in the absence of fedcoins, a growing number of so-called “stablecoins” have filled the void, claiming to be backed by fiat currency without the central bank imprimatur.

2. Cryptocurrencies could help central banks do their job, or put them out of one.

During recessions, federal banks often stimulate the economy by injecting cash, essentially creating money out of thin air to keep it circulating. Some observers argue that a fedcoin could make that job even easier.