Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Wednesday, December 27, 2017

Fedcoin and blockchain

I see Campbell Harvey promoting the idea of Fedcoin here: "Bitcoin is Big. But Fedcoin is Bigger." I'm not sure I agree with his pitch for the idea.

Let's start with Harvey's claim that
"Bitcoin and other cryptocurrencies are based on a complicated technology known as blockchain, which acts like a digital ledger of all transactions completed with the currency."
Complicated? Well, yes and no. As I explain here "Why the blockchain should be familiar to you," there's a sense in which blockchain technology--a growing record of communal history existing on a distributed virtual ledger updated via a communal consensus algorithm--is an ancient innovation. Indeed, I claim that most of our small-group social interactions today still make extensive use of blockchain technology. Of course, the underlying mechanics of how Bitcoin works seems complicated to most people. But the same could be said of how electronic payments are executed today.

A digital ledger of all transactions completed with the currency? Well, not exactly. Remember, there are always two sides to any transaction, with money flowing in one direction and something else flowing in the other. Bitcoin does not record what moves in the other direction. All that is recorded is the movement of bitcoin from wallet to wallet. The identity of who owns each particular wallet need not be visible. This is quite unlike the way digital money works in the banking system, where the identities of transacting parties are visible on proprietary ledgers.

He goes on to suggest that 
"It [blockchain] is somewhat similar to the serial number that you find on every dollar bill, but it actually means something because it makes bitcoin nearly impossible to counterfeit."
The notion that a monetary unit in the blockchain can be thought of as a unique non-counterfeitable serial number is not a bad analogy. The analogy recognizes that the object of concern relates to the money itself (as is the case for physical cash) and not on the identity of who owns the money (as is the case for present-day bank-sector digital money). And so, when one speaks of central banks making use of "blockchain" technology, I presume that one means the issuance of digital bearer instruments and not just plain old digital money accounts (like what we already have today at 

Unfortunately, Harvey never really defines what he means by Fedcoin. At times, I think he is talking about digital cash (digital bearer instruments secured on a blockchain). At other times, I think he's just talking about plain old central bank digital money being made available to the broader public. 

Harvey identifies the following benefits associated with Fedcoin: 1) Unlike physical cash, transactions would be visible; 2) it would permit a central bank to implement negative interest rate policies; 3) it would permit the implementation of helicopter cash. 

I'm not exactly sure what he imagines would be visible in a Fedcoin transaction. A lot depends on how the system is set up and whether the money exists as a digital bearer instrument or as plain digital money in an identifiable account. As for negative interest rate policy, yes it would be possible, though this would hardly serve as a panacea as far as monetary policy is concerned. Finally, helicopter cash is possible even today. The barrier here is not technological, it is political. 

On top of this, Harvey also suggests efficiency gains in payments are possible:
"Fedcoin, by contrast, would be decentralized to various Federal Reserve banks. There would be central control over the money supply, just as we have today, but meanwhile, the technology would offer vast improvements in transaction efficiency. Digital transactions are quick, cheap and potentially a lot more secure than the system we have today."
The technology (blockchain, I presume) would offer vast improvements in transaction efficiency? I confess that I simply cannot see what people are talking about when they say things like this. In my mind, there is nothing that can beat a centrally managed ledger (with backups) in terms of cost efficiency. Consensus record-keeping methods are inherently slower and more costly. There may be applications where these costs are worth bearing. But managing a central bank digital currency is not one of these applications. 


My writings on the subject of Bitcoin can be found here: Collected Works.

Thursday, December 21, 2017

My perspective on the Bitcoin Project (collected works)

It's true, I really did say that.
It's Christmas time and I'm in a giving mood. So I thought I'd collect all my writings and talks related to Bitcoin and blockchain in one easy-to-access spot.

Like many people, I first took notice of Bitcoin in 2013, after its price soared to over $1000, before plummeting significantly. Many economists dismissed the phenomenon as just another bubble/scam. This was my initial instinct as well, but after checking under the hood, I discovered something intriguing and worth learning more about.

Bitcoin/blockchain is generally much better understood today than it was back then, although an air of mystery persists. But the concept is not very complicated at all, even if the underlying mechanics are. I liken this situation to how we understand machines. For example, most of us roughly understand how an internal combustion engine works, even if we don't know enough to build or repair one ourselves. Hopefully, you'll find some similar level intuition in my writings on the subject below.  You may also find my posts and presentations of interest because I approach the subject from the perspective of an academic / central banker.

I list my blog posts and talks on the subject below in chronological order (to monitor how my thinking evolves on the subject).

[1] Why Gold and Bitcoin Make Lousy Money. April 23, 2013. Link to blog post.

[2] Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies. Dialogue with the Fed (a public lecture hosted by the Federal Reserve Bank of St. Louis), March 31, 2014. Slide deck. Link to presentation.

[3] The Virtual Currency Revolution. Opening address at the DATA annual meeting, April 10, 2014. Link to presentation.

[4] Cryptocurrencies: Bitcoin and Beyond. SFU Vancouver Speakers Series, July 7, 2014. Link to presentation.

[5] Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currency. Federal Reserve Bank of Atlanta, Jacksonville Branch, November 16, 2014. Updated slide deck.

[6] Bitcoiners: Surely We Can Do Buiter Than This? November 27, 2014. Link to blog post.

[7] Money and Payments, or How We Move Marbles. February 1, 2015. Link to blog post.

[8] Fedcoin: On the Desirability of a Government Cryptocurrency. International Workshop on P2P Financial Systems, Frankfurt, February, 2015. Link to presentation. Link to related blog post.

[9] Bitcoin: A Decentralized Public-Legder Digital-Asset-Transfer Mechanism. Bendheim Lecture, Princeton University, May 1, 2015. Link to presentation.

[10] Fedcoin and the Implications of Cryptocurrencies Issued by Central Banks. June 15, 2015. Link to podcast.

[11] Bitcoin and Central Banking. November 12, 2015. Link to blog post.

[12] Is Bitcoin a Safe Asset? March 27, 2016. Link to blog post.

[13] Monetary Policy Implications of Blockchain Technology. May 1, 2016. Link to blog post.

[14] Why the Blockchain Should Be Familiar to You, May 5, 2016. Link to blog post.

[15] Can the Blockchain Kill Fake News? December 30, 2016. Link to blog post.

[16] Tyler Cowen on Central Bank Cryptocurrencies. November 27, 2017. Link to blog post

[17] Fedcoin and Blockchain. December 27, 2017. Link to blog post

[18] Blockchain: What it is, what it does, and why you probably don't need one. January 21, 2018. Link to blog post. Link to Federal Reserve Bank of St. Louis Review article.

[19] Bitcoin: Beyond the Basics. Timely Topics, St. Louis Fed. Link to podcast (16 minutes).

[20] Blockchain, Cryptocurrencies and Central Banks, Dialogue with the Fed, August 29, 2018. Link to presentation

[21] Smart Contracts and Asset Tokenization. November 8, 2018. Link to blog post

[22] Whither the Price of Bitcoin (with Andrew Spewak). January 11, 2019. Link to Federal Reserve Bank of St. Louis Economic Synopses. 

[23] Central Bank Digital Currencies. Interview with Paul Buitink, November 21, 2020.

[25] The Blockchain Revolution: Decoding Digital Currencies (with Fernando Martin). Federal Reserve Bank of St. Louis Annual Report, April 2022.


Fedcoin: The Implications of Cryptocurrencies Issued by Central Banks. Epicenter, June 15, 2015.
Central Banker Decrypts. A Bit Cryptic, October 31, 2018. 
The Impact of Central Bank Digital Currencies on Private Banks. Epicenter, December 18, 2018.
Cryptocurrencies. Equilibrium, SFU Economics, January3, 2019.

Monday, December 18, 2017

The Great American Slump (update)

I detect some chatter out there concerning the recent "unexpected" rise in the U.S. labor force participation rate. The discussion is related mainly to the question of whether the labor market has fully recovered from the effects of the Great Recession. I suggested back in 2010 (here) that American recovery dynamic might be a prolonged one, at least, taking the Great Canadian Slump as a model. I updated that analysis here in 2016. In light of the recent discussion, I thought I'd see where we stand today.

Here is EPOP (employment-to-population ratio) for Canada (beginning in 1990) and the United States (beginning in 2008).

The two series bear a striking resemblance 40 quarters (10 years) out. Here is what the picture looks like when we restrict attention to the prime-age (25-54) population:


 The Great Recession appears to have a significantly larger impact on the prime-age labor market in the United States, relative to the 1990 recession in Canada. Look how it took about 34 quarters for prime-age EPOP to recover in Canada. We are now 38 quarters out since the Great Recession began with prime-age EPOP in the U.S. still almost two points below its initial value. I interpret this to mean that the labor market has not yet fully recovered. And no, I do not think this has very much to do with "aggregate demand deficiency." (See here, here and here if you want some elaboration.)

Here is what the picture look like for the participation rate:
The relative decline in the U.S. participation rate here might have something to do with demographics. When we restrict attention to prime-age, we do see evidence of a recovery that is not yet complete: