Since the inception of Bitcoin in 2008, we have seen a great number of other cryptocurrencies rise and fall. So far, all of these projects have come from the private sector. With the negligible example of Venezuela, a government has never launched its own fully crypto or fully digital currency. A FedCoin is this hypothetical government-issued currency. Its possible traits, feasibility, and competitive advantages and weaknesses will be examined in relation to Bitcoin and the US Dollar.
To examine the feasibility of a FedCoin, it is vital to understand the nature of Bitcoin and its underlying structure, blockchain, a form of decentralized ledger technology. Many outside the cryptocurrency industry hear that blockchain is a new, more secure database and leap to the conclusion that it will fix all of the data security problems of our traditional systems. These assumptions stem from a misunderstanding of what blockchain is and what it is used for. These same misconceptions allow others to believe that a FedCoin, a government (or central bank) -issued cryptocurrency will render Bitcoin and altcoins irrelevant or even secondary. In this piece, I will examine this possibility and explain the barriers and incentives of a possible FedCoin. I will not hash out the possibility or logistics of a totalitarian ban of all cryptocurrencies, though several points in this article do touch on the practicality of such a plan. Instead, I will consider FedCoin’s competitiveness in a somewhat free market similar to the present. It should also be noted that many of the ideas and issues addressed here apply similarly to corporate or any centralized digital currency.
This piece is a high-level analysis of Bitcoin, FedCoin, and cryptocurrency. It will examine the economics and theory behind Bitcoin, not the underlying cryptography and software. While several of the topics I introduce can be explored in far greater detail, comprehensive understanding is not necessary to understand their effects on Bitcoin and hypothetical effects on the feasibility of FedCoin. For a quick introduction to Bitcoin and an explanation of its functionality, see my other article, “An Introduction to Bitcoin”.
A glossary can be found here.
Proof-of-Work or another System?
In order to write to the Bitcoin blockchain, significant energy and computing power are required. This ensures miners (those who try to write to the blockchain) have skin in the game and a reason to submit valid blocks. Through this Proof-of-Work (PoW) system, nodes can accept blocks as valid without knowing their origin. This system also ensures there is a high cost to any actor trying to rewrite the blockchain (for example, to undo a transaction). Miners are incentivized by collecting transaction fees and block rewards. The reason Proof-of-Work was invented and included in Bitcoin was to allow anonymous, dispersed, and unconnected actors to cooperate and validate blocks. It allows decentralized communities to agree on a single truth.
A FedCoin blockchain could be run on a PoW system, but this makes little sense and imposes needless costs on the Government. If all parties capable of writing to the blockchain are trusted and known to each other, PoW would be a waste of energy because the problems PoW solves are not present. Unlike Bitcoin’s PoW system, which converts high energy usage into security for the network, a FedCoin with only trusted, connected miners would On the other hand, allowing non-government actors to mine would forfeit control over the network and its protocol to anyone with access to energy and computing power. It would also deny governments first access to new money creation, which is critical to managing deficits, something all modern welfare states do. As with Bitcoin, a truly open Proof-of-Work system would send the price of money creation as high as the price of the money itself, destroying government’s ability to print freely. Additionally, legal issues such as “who can mine?” and “How much can they mine?” would arise, necessitating limitations and high resource costs. A national government certainly would not want to allow foreigners or foreign governments to develop large shares of hashrate (read control) over their currency. Similarly, a Proof-of-Stake (PoS) system would force governments to lock up large amounts of money in order to control the system. Both of these systems are far too competitive and open for governments, who operate as a monopoly and monopoly-maker. The legislature or autocrat or central bank chairman would be beholden to miners (and node-runners), not the traditional lobbyists, economists, and bankers.
“A FedCoin blockchain could be run on a PoW system, but this makes little sense and imposes needless costs on the Government”
Currently, PoW and PoS are the only two methods of verification that maintain some semblance of decentralization and legitimacy, although PoS is thought to lead to greater centralization than PoW. FedCoin would likely run on a more restrictive system of Proof-of-Authority, in which a few select nodes are authorized to publish blocks. Under this system, decentralization is completely lost and the myriad problems with the current banking system resurface: A hacker would only have to hack one authorized node in order to publish invalid transactions; double-spends, chargebacks, and other frauds are all again possible, necessitating mediation by a central party; master nodes (probably run by “private” and central banks) could easily print more money for themselves. Even more problems with this proof-of-authority system will be explored later. Already, however, the largest problems Bitcoin hopes to solve are unsolvable in with a FedCoin that refuses PoW.
Cryptocurrency or Digital Fiat
Cryptocurrencies such as Bitcoin are secured using cryptographic functions and key pairs. Because cryptography is based on mathematical equations, any individual with limited technical competency can anonymously and securely generate a key pair for open systems such as Bitcoin. This means that an individual can have an unlimited number of addresses and wallets. Whichever department or agency launches FedCoin, likely the US Treasury or Federal Reserve in the US, will want rigorous KYC information built into the protocol of FedCoin. This could be done by centralizing the issuance of key pairs or wallets, but that would require strict secrecy about the cryptographic function used. Essentially, the entire system would have to be closed-source and highly centralized. A better option for a government attempting to build KYC laws into FedCoin’s protocol would be to abandon the idea of cryptocurrency altogether and settle for the creation of a digital fiat currency. Identities and reputations (ie. credit scores) could be more easily controlled, blockchain technology could still be used if convenient, and secrecy would not be as necessary. However, at such a high level of centralization, FedCoin would resemble the current system almost exactly and offer few if any competitive advantages over what we have today. A digital currency would be much more malleable: censorship rules –imposing sanctions, banning illicit transactions, taxing or blacklisting merchants or entire countries — could be enforced; the source code could be changed or even different across geography. Signed Bitcoin transactions are valid regardless of their destination’s owner, geography, or any political influence, and transactions can be submitted in a variety of ways –over radio, Tor, mesh network, or even satellite. FedCoin would require tighter controls on its transactions.
“At such a high level of centralization, FedCoin would resemble the current system almost exactly and offer few if any competitie advantages”
Introducing censorship into FedCoin would harm its own adoption and incentivize Bitcoin adoption. Political motivations such as the desire to exclude terrorist organizations or drug cartels from the financial system would push individuals away from FedCoin on the margins. If governments coded laws against marijuana, alcohol, prostitution or similarly discouraged activities into FedCoin’s protocol, monetary policy would become entangled with more contentious social conflicts like the War on Drugs. Ordinary citizens who no longer had easy access to illicit activities or substances would reject FedCoin and the value proposition for Bitcoin would become more apparent. These factors would all suppress FedCoin adoption. To avoid this, any major regulation that would be baked into FedCoin’s protocol would have to come slowly and after mainstream adoption. As merely a digital currency, FedCoin would be only marginally faster and easier than today’s wire transfer system. Because of the non-viability of FedCoin as a digital currency seems clear, I will consider FedCoin as a cryptocurrency for the rest of the article.
Centralized or Decentralized Ledger
Bitcoin is built on a blockchain, an extremely secure, slow, and inefficient database which is transparent, immutable, and, in Bitcoin’s case (but not all cryptocurrencies), decentralized. None of these features appeal to governments at all. For a corrupt government, or even a relatively “good” one with sensitive operations and expenses, a currency which reveals all transactions to all participating parties is untenable. So, from the original Bitcoin model, we must immediately toss out any idea of “perfect binding”, the ability for nodes to audit total supply and view transaction or address amounts. Moreover, powerful nations like the United States rely on strict control of financial institutions such as banks, clearinghouses, and the SWIFT system to exert power over their citizens and coerce other nations. While smaller nations lack leverage over the international banking system, they universally rely on banks as central, easily regulated entities through which they can audit and tax their populations. With a decentralized ledger, governments would lose this ability, and worse, citizens would have the ability to audit their government. A centralized ledger on the other hand would eliminate many of the advantages of a cryptocurrency to begin with. Let’s examine both cases.
FedCoin is Decentralized:
If Governments allow citizens and corporations to store the blockchain, they forfeit their ability to reverse transactions, freeze accounts, and potentially keep track of all addresses. These attributes already put FedCoin at a serious disadvantage against even the most obscure altcoins. Physical transactions (ie. OpenDime), side-chains (ie. Liquid), and additional layers (ie. Lightning) would all place immense burdens on regulators. Granted, Governments today allow offline and physical transactions, but these are increasingly obsolete, regulated, or illicit. With such high deficits and NIRPs becoming more likely by the day, these methods are increasingly inconvenient for governments. The IMF has recommended nations ban cash in order to implement NIRPs, and many governments are trending in that direction. Decentralization would also hinder taxation efforts and fully expose inflation rates and other monetary policies of FedCoin. Due to Governments’ need for control, a Monero (XMR)-style transaction, which hides transaction amounts from the network, would be difficult to implement. It would afford a wide array of anti-state actors great privacy and obfuscate taxable incomes from the government. One potential solution would be to grant Government transactions this privacy while forcing citizens to expose their transactions. This would protect government corruption and sensitive expenses while allowing for easy taxation.
A decentralized system would also leave FedCoin vulnerable to public opinion. As we saw with the UASF and earlier MASFs, both nodes and miners exert influence on the nature of the protocol. Given Government power, UASFs could potentially be ignored, but this conflict could cripple or split FedCoin, resulting in multiple forks.
FedCoin is Centralized:
A centralized system strips FedCoin of nearly all of the benefits of blockchain and cryptocurrency technology: Immutability of transaction history and the protocol itself are out the window. The logical chain of effects stemming from a centralized system quickly leads to a FedCoin that doesn’t differ much from the current banking system with all its inefficiencies, manipulation, and rampant fraud. Firstly, all computing and organization fall on the government, and security risks are far more prevalent. While Bitcoin has close to zero downtime in its 10+ years of existence, a centralized FedCoin, like centralized altcoins and government websites, would be prone to insecurity and downtime. Downtime for a national monetary system would be disastrous, especially for the financial sector, which deals in terms of seconds, not hours. A centralized system also undermines the usefulness of a PoW system. Proof-of-Authority, wherein a few trusted nodes clear all transactions, much like the current regional Federal Banks, wire transfers system, and clearinghouses, is the more likely alternative.
In order to reduce their burden, governments will grant Authorization to banks, yielding power over the monetary system to pseudo-private interests. Banks would run master nodes and clear transactions, and would likely be more efficient than the government. Yet public outrage would destroy these efficiency gains: already, most Americans are convinced that banks have control over the government. As master nodes, Banks could directly control inflation rates to print their own money (more so than they do today) and grant themselves bailouts free of government or popular approval. Small banks lacking Authorization would rapidly be driven extinct and the near-monopolized banking industry would centralize even farther.
Bitcoin’s hard cap
Bitcoin was conceived with a hard cap of 21 Million bitcoins (2.1x1015 satoshis). This means that at a certain point, Bitcoin’s inflation rate (currently at around 4% and halving quadrennially) will fall below zero as it gains adoption (demand rises) and coins are lost or divided into dust (supply falls). This means that someone who saves (Hodls) bitcoin will accrue more wealth over time. However, this is highly inconvenient for governments for several reasons. Most importantly, almost all modern governments in developed nations, being welfare states, run large annual deficits and accumulate massive debts. Currently, US debts run above $22 Trillion. Total liabilities are far higher. Even China, to whom much of the US debt is owed, has over $5.2 trillion in national debt. To finance these deficits and pay off the interest on the debt, it is critical that governments inflate (read devalue) their own currency. Without inflation, governments simply could not afford to fund programs such as extensive entitlements, multi-decade wars, and bank bailouts. Additionally, governments worldwide are beholden to special interests: banks, large businesses, MMT economists, and other governments. These large institutions benefit greatly from inflation via the Cantillon Effect and would be severely inconvenienced by a fair, apolitical, uninflatable currency.
These interests along with financial necessity will further prevent any FedCoin from implementing a hard cap. Keynesians and MMT economists have successfully convinced most citizens that deflation or even zero-inflation are scary and detrimental to economic growth. The absurdity of these beliefs is irrelevant to Bitcoin, but it does contribute to the impossibility of a capped-supply FedCoin. Some Bitcoin enthusiasts and Austrian economists believe that the lack of a hard-cap is, in itself, sufficient to destroy FedCoin’s chances. This is certainly true in a free market, and may even be true in the long-run for semi-free markets, but the reach and power of government aggression is rarely overestimated. That the cost of inflation could surpass the cost of safety for individuals who choose an illegal Bitcoin over legal FedCoin is unknown.
It is important to note that Bitcoin and other cryptocurrencies first saw significant pricing as a function of speculation and investment. Without a limited supply, the speculative prospects FedCoin offers are handicapped. Over the long run, just like the US Dollar, FedCoin’s value should only fall whereas Bitcoin’s should rise. Short-term price action may be different, but a foundational value proposition present in Bitcoin is lacking for an inflationary FedCoin.
Faith and malleability
Even if FedCoin did initially implement a hard cap, its inherent centralization would undermine any faith in that monetary policy’s longevity. As with Ethereum, any such hardcap could be overridden at any moment. This exposes a larger problem with FedCoin: Faith in its protocol’s malleability. Bitcoin is an open-sourced system with very strong memes (in both the Dawkins and the internet sense) such as the 21 Million cap, a block size limit, and overall conservatism with regards to the layer one protocol. While memes are usually considered jokes, they are a critical part of Bitcoin’s security model. In fact, all consensus-based systems rely on such memes and the competition of ideas, while governments and centralized institutions rely on rule by fiat. Such fiats can be altered or countermanded with a stroke of a pen; memetic behavior and consensus are far more resistant to change. Furthermore, a closed-source FedCoin would hinder citizen’s ability to know whether and how the protocol was changing. We see the uncertainty caused by fiat rule today in the constant, inane speculation about the Federal Reserve’s every word. An open-sourced FedCoin would leave every facet of the currency susceptible to the same erratic decision-making process. It is dubious that a Government would open-source FedCoin’s protocol as such a system would lack any innovation or improvement over the traditional banking system. For argument’s sake, let’s examine the scenarios where FedCoin is and isn’t open-sourced:
FedCoin is Open-sourced:
Optimistically, this would allow statist programmers and banks to collaborate on securing and developing the coin. Companies like JP Morgan, which employees tens of thousands of blockchain engineers, would jump at the opportunity to unseat Bitcoin and install a centralized currency which they could manipulate. Countries or International Organizations might even cooperate on building stable cryptocurrencies that work almost as well as Bitcoin.
However, currency is neither politically neutral nor isolated from interstate conflict. An open-source currency would expose any manipulation by a government to its citizens and its trade partners, severely restricting a government’s economic and political means. A nation like China, which has engaged in currency manipulation to obtain favorable trade stats would be unable to do so. Since citizens could also analyze their government’s monetary policy with full transparency, the issue would take a far more central role in political battles, harming any attempts at protocol ossification and undermining faith in the currency itself. Today’s tax policy battles would center on inflation rates (also a tax) and other protocol specs. Today, the Treasury and Fed’s relatively apolitical nature shield them from lobbying efforts. If open-sourced, FedCoin would become a lobbying battleground (See: Election of 1896).
Additionally, as we have seen with any open-source project, forks would abound, and since this is FedCoin, a superior, privately built fork would inevitably emerge and threaten FedCoin. Such a fork would require little to no extra features since switching costs would be low. An added hard cap with no other changes would be a sufficient threat. Banning such forks would be difficult given their similarity to FedCoin.
FedCoin is Closed-sourced:
A closed-source FedCoin would attract almost exclusively nocoiners, economists, and mediocre programmers. Today, Bitcoin sources developers from across the world, regardless of location, timezone, or wealth. FedCoin is not likely obtain the same reach due to its nation-state focus and adversarial nature. For FedCoin to properly function at anywhere near Bitcoin-level, it would have to be a cryptocurrency, not merely a centralized digital ledger as with traditional banks. This already requires highly technical and specialized skills. Those with these skills are mostly involved in either Bitcoin, Ethereum, or some similar project. New signature schemes like SegWit, Schnorr, Bulletproofs, and more are built exclusively by the tiny handful of developers capable of doing so. Convincing these motivated programmers to undermine years of their own work for an entity they likely despise, and to entirely alter their modus operandi (open-source contribution), would likely yield a lower quality product. Additionally, it would be impossible to trust a closed-source system’s hard cap, double-spend resistance, and other features. Bitcoin is as conservative as it is for safety and stability reasons. For every change, consensus is required. FedCoin could be altered by fiat, but efficiency improvements, such as SegWit, Schnorr, and others would be unlikely to succeed. SegWit and Schnorr both reduce miner fees (read profit), and was/is strongly opposed by some mining conglomerates. If the battle over SegWit2X had occurred in committee rooms and Congressional offices instead of on Reddit, Twitter, and IRC, the outcome might have been different. (See: New York Agreement)
A Push vs. Pull System
As explained in “An Introduction to Bitcoin”, Bitcoin is a push system whereas the traditional banking system is a pull system. In Bitcoin, one must send bitcoin out of their account. In the legacy system, merchants and the bank pull money out of the account and are trusted to take the right amount. This small detail is critical to the operation of a cryptocurrency. Bitcoin today is nearly impossible to tax if not for the strongly regulated exchanges, most of which readily submit to KYC laws and report gains to local governments. A Bitcoiner who holds their own keys will be nearly impossible to tax. It would involve finding and proving their ownership of the bitcoin in the first place, and then “convincing” them to send some of the coins to the revenue service. Failure to comply could result in the confiscation of other assets or arrest, but not actual confiscation of the bitcoin without knowledge of the private key. Taxes could of course be imposed at the point of sale or on companies as they pay salaries: given their public nature, companies are far more vulnerable to taxation and regulation. However, as privacy-enabling features of bitcoin continue to grow stronger, under-the-table payments resembling the privacy of cash transactions are likely to become more prevalent.
For FedCoin to serve government interests and remain an easily taxable, freezable, censorable asset, it would have to be a pull system either on a protocol level or a social level. If cryptographic keys were to be used, FedCoin could remain a push system on the protocol level if all key pairs were registered and tied to a name and address. At that level of control, being a pull system would serve no purpose. A centralized database of key pairs would also be an extremely lucrative target for hackers and privacy would fall to near zero. Considering all these factors, a pull system-based cryptocurrency would struggle to compete with even the existent financial system, and would resemble the legacy system far more than the Bitcoin network regardless.
Bitcoin is still in its early stages, and a majority of people have yet to own or use Bitcoin. At this stage, immediate switching costs to FedCoin would be relatively low considering most household wealth is stored in a government fiat or stocks anyway. However, those who are currently in Bitcoin are so because of the astronomical returns they see in Bitcoin 5 to 30 years from now. Convincing them to sell their investments for FedCoin would be difficult without force. Such force is not out of the question by any means though. However, FedCoin could never be the unicorn Bitcoiners think Bitcoin is for two reasons: one: the hard cap, again; two: for FedCoin to be rolled out on a national level, it would likely have be pegged to the dollar and forcibly or sublty exchanged for people’s USD savings. Of course, FedCoin could ICO at a low price and simply hope that adoption happens on a nationwide basis, but this is a gamble at best, with large downsides. The easier option is “asking” banks to redenominate all their deposits in FedCoin overnight or incrementally, ensuring rapid merchant adoption. This method would preclude any investor from believing in “moon” or exponential gains for FedCoin. Because of this, an “airdrop” of FedCoin to replace USD or any national currency would also require all other cryptocurrencies to be outlawed or at least heavily discouraged. Today, this might very well be possible, but as adoption and development continue to advance, it becomes more difficult every year.
For the United States, which controls the reserve currency of the world, FedCoins –American as well as foreign ones– would pose a major threat to its status as global hegemon. A United States FedCoin would jeopardize the petrodollar regime that currently upholds American power abroad and over the global financial system. Today, the US Dollar maintains buy-in from even its enemies: China and Russia both own large amounts of US debt (though Russia’s share has fallen significantly) and Iran accepted USD payment as part of the JCPOA (the nuclear agreement). If a FedCoin was launched, the extent to which this hegemonic status could be transferred to FedCoin is questionable. Any FedCoin is almost sure to give the issuing government more extensive control over transactions and participation, so nations who anticipate uncertain relations with the United States have strong reason to resist a currency that would give the US even more control over the financial system. Furthermore, resentment against the petrodollar is already growing, so this hegemonic status could be waning regardless of the launch of a FedCoin. China and Russia have, in recent years, been slowly moving away from the Dollar in attempts to reassert political sovereignty. In 2018, China began denominating oil futures in Yuan and Russia sold off 84% of its US-denominated debt. So far, these steps have had limited effects, but they indicate a clear, politically motivated trend away from the petrodollar. Due to many of the same factors, this trend could strengthen the case for a FedCoin in non-American countries, especially those under sanctions or caught in tariff wars.
In the same vein as many other weaknesses, FedCoin is likely to fail because it will be used solely as a last resort by Central Banks and governments. Before a FedCoin is implemented, other more familiar strategies will be attempted: an Nth round of Quantitative Easing, Negative Interest Rates, ever-changing CPI measurements, and possibly the eradication of cash. Already, the IMF and ECB have released plans for “deeply negative interest rates”. This will involve destroying physical cash. Such policies will harm FedCoin’s feasibility for several reasons: Firstly, it will boost government statistics and convince central bankers that their policies are working in the short term; secondly, it will expose the broken nature of central banking and build popular, though certainly minority, resentment against the traditional system; lastly, it will force almost all commerce onto digital platforms and stimulate familiarity with digital currency, whether fiat or cryptocurrency. The modern monetary theorists who run central banks will universally try Keynesian policies before they attempt to launch a cryptocurrency. Keynesianism and central banking are based on the idea that when a debt bubble bursts, the solution is more debt. When bad loans and overspending cause a bubble, more loans and more spending are the fix. High savings are harmful and must be punished. So when QE(n) fails, QE(n+1) will, to them, be the obvious next step. This will buy even more time for Bitcoin adoption, ossification, and increased robustness against a state attack. It will also make it harder for the government, when it does attempt to implement FedCoin, to return to sustainable, sane monetary policy.
What if a state were to be abnormally avant garde? A small country with a technologically competent government might be capable of launching a national currency in parallel or on top of their national currency in the next few years, before Bitcoin has gained sufficient adoption and security (socially and politically speaking). Several paradoxes form barriers to this currency’s success. Regime type, power, and wealth each present paradoxical disincentives for adoption.
Quick, decisive action is not common or easy in stable, democratic countries, and stable, valued currencies and functional, popular government are not common in autocratic ones. Those countries who are both democratic and in touch with technological developments are also more inclined to have favorable policies towards Bitcoin, and in order to launch a FedCoin, those policies would need to be reversed in favor of punitive regulation if not an outright ban. Incentives for using FedCoin — the ability to pay taxes, subsidized adoption for merchants, etc. — would also be used. Such regulation would be quite difficult to pass and implement in nations with free market principles and relatively democratic rule of law. For autocratic regimes, often beholden to military and business interests and generally lacking transparency, implementing a fair, transparent currency would anger national elites and entrenched institutions. As with the petro, an autocratic government’s FedCoin would be rejected by the people for its corruption, insecurity, and as a form of protest.
Another paradox exists in terms of the size of the nation itself: A small country will find it easier to implement such a currency across its small, illiquid, or tight-knit economy, but will exert very little competitive pressure on Bitcoin and even less pressure on the international community to follow suit. If Costa Rica launched FedCoin, it is dubious other nations would adopt it on a large scale, nor would it threaten Bitcoin. On the opposite side of the coin, launching FedCoin in China, India, or a similarly large nation would impose extraordinary costs, socially, politically, and economically, on the government and economy of the nation. Coordination problems would be immense. Convincing other nations to accept the currency would be even harder for large nations as they are more likely to be involved in geopolitical or other competition with neighboring nations. If Russia launched a FedCoin, what are the odds the US would accept it? Worse, what are the odds the US wouldn’t attack, sanction, or manipulate the new coin?
Lastly, wealth presents an impediment to FedCoin’s success. In poor or undeveloped countries, governments have fewer resources with which to hire for, build, coordinate, and implement the new currency. Its economic situation will be more fragile, and unrelated economic downturns could kill FedCoin in its early days if political opponents or citizens blame it for the recession. Wealthy countries face the opposite problems. Their economies are too large to quickly integrate an entirely new currency, in addition to the unique infrastructure required to handle cryptocurrency. For the exact same reasons Bitcoin adoption (especially merchant adoption has been slow (a contentious point itself), FedCoin’s sudden implementation would be difficult to handle for traditional institutions. For similar reasons, powerful interests such as banks, stock exchanges, and more will exert considerable influence on government and stall implementation. If FedCoin was not based on PoW, the energy industry would also have much to lose if FedCoin supplanted Bitcoin, whose market share, though small, is growing rapidly. Lastly, depending on timing, Bitcoin companies themselves might have amassed sufficient economic clout to preempt the new currency. Already, institutional power and money is entering Bitcoin in the form of the Winklevoss twins, Bitmain, and Coinbase. These players have already learned how to play the political game and are equipped and experienced enough to use the regulatory battlefield to their advantage. If even larger institutions like Fidelity enter the Bitcoin industry, they could further bolster this defense. Large banks cannot be counted on, however. JP Morgan, which hires tens of thousands of blockchain engineers, launched its own coin, but would still have much to gain from FedCoin, especially one built on Proof-of-Authority. Banks such as JPM enter the crypto space chasing profit. If they decide there is more benefit in backing (or co-opting) FedCoin, they will pivot in an instant. Tech companies and merchants will likely remain more loyal to Bitcoin, in part because they bear most of the burden of switching costs while being excluded from the benefits of money-printing enjoyed by the banks. Microsoft recently announced Ion a blockchain-based identity project built on Bitcoin.
These wealth effects on rich countries could quickly reverse if legacy elites felt threatened by Bitcoin itself. In that case, the implementation of FedCoin would not symbolize a change of the status quo, but a method for its preservation. From this perspective, FedCoin could win overwhelming support from legacy institutions despite any switching costs. For Bitcoin to inspire this level of fear and consensus among elites, it would have to be much more robust and legitimate, likely to such a level that FedCoin could not supplant it. Again, the potentially infinite and continuous returns to Bitcoin might subvert any concerted attempt to implement a stable currency, which obviously could not experience atmospheric gains.
Currency is a complicated asset, each unique one facing many problems and each solving some of them. Bitcoin was created to solve the government fiat problems: excessive printing, market manipulation, lack of access, fraud, and inequity. As much as it solves, it is not a flawless panacea. FedCoin too, would solve a few problems with the existing financial system, but, based on the analysis above, it is unlikely to supplant Bitcoin as the dominant cryptocurrency. A government-backed cryptocurrency unsolves almost all the problems solved by cryptocurrency’s invention. For FedCoin to copy Bitcoin by being blockchain-based would contradict the reasons blockchain was invented. For FedCoin to be decentralized and open sourced would contradict the benefits (for governments) of launching FedCoin. To be a cryptocurrency would strain a government’s ability to build a better product capable of dethroning Bitcoin. If QE, NIRP, and many other Keynesian “tricks” finally fail in the eyes of the central bankers, the above weaknesses of a government cryptocurrency will surely not get in the way of an attempt at FedCoin. Nor will they necessarily be enough In the coming years, governments are almost certain to take a stab at the concept.
I believe the smaller, less influential nations will be more willing to experiment with cryptocurrency as they face lower scaling and switching costs and less international resistance, but they will be followed by larger institutions such as the United States, the EU, and possibly the IMF, World Bank, or the UN. Several of the problems I pointed out will only become apparent after FedCoin’s release, along with many more which I failed to notice. However, for all technology has done to liberate the individual, it has also given great power to the state, as evidenced by China’s ever growing police state. The possibility of FedCoin’s forced implementation and even monopoly status remains intact, not by any economic law or advantage of FedCoin, but through brute force. If a FedCoin were to gain critical mass and nationwide legitimacy, it would deal a significant blow to cryptocurrencies’ value proposition, which currently enjoys strong advantages over legacy currencies. Privacy and other freedoms would also suffer greatly if FedCoin were to gain widespread adoption, and while not covered in this paper, the moral and societal implications of FedCoin must also be accounted for in judging its costs and benefits.