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.

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