What would Fedcoin look like?

JW,  a loyal MR reader, writes to me:

It’s 2018, Janet Yellen has been renominated to be Fed Chair by President Walker having served a successful first term of solid growth and low inflation.  However, to achieve such growth Yellen has had to maintain very low interest rates.  Then, disaster strikes.  France leaves the Euro unexpectedly and causes a world wide credit crunch.  It’s 2008 all over again.  President Walker is unwilling to do any stimulus.  Yellen decides that a regime change is necessary at the Fed.

Taking to heart MMT, Keynes, Bernanke, Yellen merges Keynes’ idea of burying money in jars with Helicopter Ben’s idea of dropping money from the sky.  The Fed announces that the United States is going to create its own cryptocurrency, which can be exchanged for US dollars at any US regulated depository institution.  No or minimal fees can be charged by the banks for this exchange.  They will be created just like Bitcoin, decentralized and according to a mining algorithm.  American citizens can mine them, create businesses to do so, and put people to work.  Unlike Bitcoin, the supply of DollarCoin will not be finite, capped at 21 million.  Instead, DollarCoin will be targeted to grow at an inflation rate consistent with an NGDPLT of 20 trillion US dollars.  Liquidity is restored.  No QE is necessary.  CNBC starts cheerfully referring to DollarCoin as YellenCoin.

Meanwhile, Bitcoin plummets in value.  With the US Government now accepting a cryptocurrency, its advantages vanish.  People’s belief in its value goes away, and looking down, it crashes.  Remittances are now sent to relatives in Africa and Latin America by YellenCoin, just as people once did briefly in Bitcoin.

It is interesting to think about why this is so implausible.  There are a few reasons:

1. YellenCoin would be a means of payment but not the medium of account.  This would move the economy into a currency substitution model, a’la Girton and Roper, but would not have the effects of a straightforward monetary expansion.

2. Cryptocurrencies are much more likely to be used for some kinds of transactions than others.  So this act of “monetary policy” would be very much non-neutral.

3. Central banks are not supposed to be seen as taking major risks or overturning the established order of things.  They are highly risk-averse when it comes to their public reputations, and their very much prefer sins of omission to sins of commission.  If the Fed established Fedcoin and something went wrong with the idea, they would be subject to especially heavy blame.  In the meantime, few people (are there exceptions?) are blaming them for not establishing a cryptocurrency.

Comments

"Meanwhile, Bitcoin plummets in value."

What a laughable statement. Bitcoin's value is based on the fact that it's going to finally put an end to theft by government stationary bandits. I would suspect that the Fed might be out of business by 2018.
Even after the Mt. Gox incident Bitcoin is surgining, stocks are up, Bay Area housing is up - this is the new economy emergining and Bitcoin IS its currency.

The "government" seized all the bitcoin when they seized the computers of Silk Road. Unless the government uses them to do stings, or funds CIA ops, those bitcoin are gone forever from the universe..

The government plans to sell those Silk Road bitcoins. You think they're gonna throw away money?

Yeah, because that would be the first time the government has thrown away money.

Good flame is hard to keep up.

Though, as we see, bad flame is remarkably easy.

Urso's on a roll lately.

Will bitcoin exist by the end of the year??

With 17% of bitcoin suddenly vanished, or so it seems, the problems of bitcoin are proving to be just like the problems with gold and silver deposits before the Fed was created along with the FDIC.

Supposedly a hacker suddenly choosing family throws out old computers engaged in mining, only later remembering his bitcoin wallet was on them, and is now buried deep in a landfill, the originally $50 worth of bitcoin mining suddenly worth a million dollars. Like gold coins, those are basically buried forever, unless something allows someone to discover them like a couple discovered 1400 Gold Eagles in their backyard.

What you wrote here doesn't make a lo of sense. Bitcoin keeps going up despite all the naysayers.

The thing about all these coins is that they are consensus-based, and one of the features of consensus-based coins is that it is very hard to change fundamental features of the coin, eg money creation schedule. Those attributes are in the coin's protocol from the beginning. So the Fed would have to get the inflation rate correct from day 1, because once the first coin is mined, good luck changing the coin creation schedule. If Yellen designed and released a coin which targeted what later the Fed deemed to be an 'incorrect' inflation rate, then their only recourse would be to convince a majority of users to switch to the new money creation schedule by government decree: "All FedCoins now have a 2.5% inflation rate built into the money creation rate, and all Fedcoins with different inflation rates are no longer FedCoins and are not legal tender." And the Fed might be tempted to have monthly meetings to determine what the correct inflation rate should be. And then why not just say that only certain banks under the watchful eyes of the government are allowed to mine the coins? Because, you know, security and control, right?

So there you have it, the Fedcoin.

It would be a trivial extension of current crypto currency protocols to have the mining rates adjustable by a trusted authority. The block chain could be dependent on periodic updates released by the Fed (or whoever) signed using public key encryption. In fact you could tailor the Fed's control however you want, allow full autonomy or limit its range to adjust mining parameters. you're not even limited to a single authority. Simply extend the same principles using cryptographic secret sharing to allow a "board" or group to vote on mining policy.

A centrally banked crypto-currency is quite feasible given present day technology. Whether there's any practical use or demand for it is another question.

The whole point of cryptocurrencies is not having a "trusted" authority.

I wouldn't say the whole point, but it is an appealing factor for many. Currencies require a clearinghouse mechanism and a supply function. Bitcoin elegantly solves the clearinghouse problem with decentralized authentication taken care of by the mining itself.

The supply could be ratcheted up or down by increasing or decreasing the complexity of the math problem miners are solving. This way, the Fed would be "trusted" with on aspect, but not the other. In my mind the Fed is decent at setting inflation targets, but abysmal in the way it implements that policy (FOMC). If the inflationary effects were more widespread instead of channeled through banks that would be a plus. Hard to see this as a long term solution, however. Banks would quickly become the most prodigious miners thereby recapturing their advantage. Large first mover advantages here.

'Cryptocurrencies are much more likely to be used for some kinds of transactions than others.'

Like credit card encoded bytes are more likely to be used for some transactions than Paypal encoded bytes?

Cash will continue to exist, of course. Checking? Well, possibly, much like how one major world world economy still uses a system of measures that no one else on the planet is under the age of 40 is even familiar with any longer.

There is no real difference in the bytes at this point - it is simply the institutions handling them that matter.

Let me elaborate this with a concrete example - a person with a fairly standard credit card (at least in the eurozone) can pay for things in any number of places - the 'currency' used are the bytes, though of course, the final unit used to pay the credit card bill will be euros.

Nonetheless, neither the Canadian merchant billing in CDN nor the French tourist paying in EUR cares about those currencies per se in this transaction. What they both care about is that the transfer of bytes representing this transaction are correctly handled. And without getting too lost in details, no central banks were involved at a level that makes any difference to either the seller or buyer.

The difference between a Zahlungsmittel and a Währung is getting even more complicated in an age of extensive networking. No one currently considers a credit card a means of payment nor a currency - and yet, to a certain extent, it has subsumed both.

If Yellencoin was simply another unit of currency available for transactions involving credit cards, it would be pretty much what currently exists in terms of a transaction involving CDN and EUR - both in Canada and in the eurozone, for both buyer and seller. That is, nothing by an exhange of bytes and an accounting settlement.

And for amusement, this is a great link to how cash would be viewed if invented today - http://www.coindesk.com/cash-invented-seen-media-today/

Interesting link, and yet we still keep seeing Bitcoin hit new heights, stocks going up and up, propery values surging, output is running an all time high.

Maybe someone should tell Canada: http://www.itbusiness.ca/news/royal-canadian-mint-readies-its-version-of-bitcoin-mintchip/46113

This won't catch on it's still backed by government fiat currency and subject to government theft. It's identicle to backing gold with money rather than the other way around. Bitcoin still reigns supreme.

Stocks keep going up.

Yo Cowen can we warn or ban this guy some is very funny too much is spam.

None of it is 'spam,' as none of it is advertising anything.

And let us be honest - he would have to be having elaborate conversations only with himself before he began to approach the level of posting that Andrew' was capable of, day in and day out.

Bitcoin really contains 2 ideas that could be split. If the fed wanted to use crypto to make a form of money, they probably only want one of those ideas.

The first idea is that the value of the money comes from performing computationally-intensive calculations. That's not useful to the fed.
The 2nd idea is that the money can be securely sent round the internet with less need for a trusted intermediary. That might be.

So you could envisage a cryptocurrency a bit like bitcoin, but instead of making coin mining very expensive, you make it very cheap but only possible if you have a suitably authorised private key (and only the fed would have such keys)

I've spent a bit of time trying to work out how good an idea this is.

It creates something very much like cash (in that the fed creates and destroys it like the mint creates and destroys cash), but transmittable via the internet. That's quite useful but possibly not earth shattering.

However, it solves a lot of the practical problems of cash (bulky and slow to transport), meaning it could be used in situations where cash is currently impractical. I think this potentially means you could have a world where you need to trust many types of financial institutions less. Currently a lot of things actually rely on the fact that when 1 bank increases a balance by a dollar, the bank where the money came from will certainly decrease their balance by a dollar. This is ensured by heavily regulating banks then trusting them. If we didn't need to trust them, maybe we could have a new class of less regulated financial institutions.

Privacy (both of ordinary people and of money launderers and other criminals) is a big issue here. There are many different ways of setting up a crypto currency to achieve different goals here. Bitcoin is only one possible goal, and probably not the goal the fed would want. The challenging bit is probably working out what privacy goals you actually want; you need to balance the legitimate desire of ordinary honest people for privacy with the legitimate desire to deny privacy to criminals. The current balance (cash is impractical in bulk and banks are heavily regulated and so can be forced to act as agents of the state) is more a consequence of our monetary technology than the natural and just solution to the problem.

Yes, this.

Something like Fedcoin is inevitable, but it needn't involve mining per se, just the shared blockchain, and guaranteed exchange with USD. Its supply is thus one and the same as USD, and thus orthogonal to the choice of monetary growth policy... but its technical features offer more interesting levers.

And as long as you're acquiescing to the Fed/USD's central role, the transaction ordering/verification/cementing doesn't need the same sort of anonymous competitive proof-of-work competition: a far smaller net of trusted nodes can do the job. You still get instant worldwide transactions and possibly interesting digital contracts.

You might get privacy under some volume threshold (with features layered in from stronger-than-Bitcoin privacy systems like Zerocoin), but conversely automatic tax/laundering reporting above some threshold.

You could give every citizen a inflation-sheltered on-blockchain Fedcoin account (similar to @Interfluidity's "Start Savings Accounts" - http://www.interfluidity.com/v2/2874.html) accessed through their handheld device. That'd make it easier than ever before to inject money 'at the edges' (as in helicopter drops or a basic income).

Compare also JP Koening, "Why the Fed is more likely to adopt bitcoin technology than kill it off" (http://jpkoning.blogspot.com/2013/04/why-fed-is-more-likely-to-adopt-bitcoin.html).

Initially just offering Fedcoin as a 'fedwire-for-everyone-with-a-handheld', with no mining, just 1:1 USD conversions, would help keep it from being seen as a "radical overturning"/major-risks approach. It'd just be a modern convenience, keeping up with Bitcoin...

BTC is trusted because mining is incentivized - decentralized pools compete to win, and all that activity goes towards securing the network. You can certainly make different designs but if you end up with only banks allowed to mine or whatnot, or government mining only, people may not trust as much.

I am not entirely sure why the "Fedcoin" would need miners at all - the Fed could simply publish a new block for the blockchain every minute, and prove that it indeed came from the fed via a private key. Proof of work is not needed if there is a trust party involved.

I would go further and say that Fedcoin wouldn't use any type of mining whatsoever. Fed servers would maintain a trusted transaction log and validate transactions, so only the PKE aspects of Bitcoin are retained. Fedcoin could be made legal tender and managed much the way it manages vault cash: banks would be allowed to swap Fedcoin for vault cash or deposits at the fed 1:1, and vice versa. The supply of Fedcoin is created/destroyed by transactions coming from/paid to a special Fed address.

Contra TC's point 1, Fedcoin so implemented would be a medium of account, just like cash.

And they have good reasons for trying. If they could make Fedcoin a popular substitute for cash, they can start to phase out the latter. Negative nominal interest rates then become possible, for Fedcoin can implement a demurrage scheme when the policy rate goes below 0. Now wouldn't that make Willem Buiter happy..

Paying people to mine coins is like paying people to do any other task the government wants for money. But instead of using up people's time to build roads or drive buses or whatever, it uses them in the production of something with no real value. Also, bitcoin mining payments are going to flow to IT and computer people - two groups unlikely to need employment in the next recession. The value of the proposal I guess is that it avoids "fiscal policy" even though that's exactly what it is. (or tax cut for the same stimulus without taking up time and computers).

Bitcoins have immense real value - other ways to productively use people could be ad clicking, uploading Facebook pictures, generating Facebook likes, tweeting, in the new economy these provide MUCH more value than old 20th century roads and bridges to nowhere.

People would be put to work for an inferior currency wich is constantly and deliberately subverted by the Fed while Bitcoin would be abandoned? Okay...

The idea is silly. YellenCoin would not displace Bitcoin.
I believe that other crypto currencies will partially displace Bitcoin. It has no unique properties. The main thing it has going for it is its first mover advantage, but barriers to entry and switching costs are extremely low.

Yellen should focus on what she's good at: contraception.

Bitcoin was just a libertarian crypto-anarchist fantasy pushed by, amongst others, this website. Haven't seen any commentary on the latest news on Bitcoin from Tyler.

The latest news is a minor MINOR hiccup. BitCoin is STILL going up. It looks as if the libertarian "crypto anarchists" are the hardheaded ones and the statists are delusionally living out the last days of the fiat currency backed state.
Stocks are Up
BitCoin keeps going up and up.

Perhaps the FedCoin is too narrow. Instead of special drawing rights, the IMF begins to mine its own crypto-currency.

Why would FedCoin (or whatever it is called) need to be mined? The Fed could just control the output, as they do with paper cash.

I see this happening, actually; mostly as a one-for-one replacement of cash.

If the government wants to drastically increase the money supply, why doesn't it declare a tax holiday for a while and fund itself by printing money?

The Fed announces that the United States is going to create its own cryptocurrency, which can be exchanged for US dollars at any US regulated depository institution

Right, because they totally kept the convertibility promise with GoldCoin ...

A far simpler solution would be for US Treasury to issue a special T-bill at par with a guarantee that the money received will be held in trust and will not be available for Congress to spend. Purchases to be made through Treasury Direct.

It is what they should have done when institutional investors ran on money market funds in 2008.

I wonder if an intermediate form of digital currency might come in the form of credit card scrip.

Consider: American MasterVisa would like to issue $10,000 worth of borrowing authority, which can be stored on a smart card, a mobile phone, a smart watch, etc. When you buy a movie ticket, it authorises the creation of 10 Visa bucks, which can be redeemed for cash by the merchant whenever the merchant wants to settle up. All the advantages of anonymity, untraceability, etc accrue, but American MasterVisa gets to enjoy the float until such time as the Visa buck is redeemed.

The advantage to the consumer is that a Visa buck is accepted anywhere a credit card is accepted. The advantage to the merchant is that they get paid in cash (scrip, really, but readily convertible scrip). MasterVisa gets to enjoy the float, plus whatever seigniorage they can squeeze out of the system.

Remember, all lending is money creation. Creation of a scrip currency is just making this process literal.

Taking to heart MMT

Least plausible part.

Also, it would be much easier to just change their forward guidance.

The Fed only has to promise to provide a level of liquidity that doesn't allow NGDP to fall like it did in 2008. Reading the Fed minutes from 2008, they were still worrying about inflation instead. So, they succeeded in their goal of not having inflation, which (like deciding to inflate) any CB can always do, only now it's pretty clear that was not the correct goal.

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Stops keep going up

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Um, even Friedman abandoned a money supply growth path as unworkable. To get consistent inflation would require a variable rate of creation of money. Part of the reason for choosing an interest rate is to allow the money supply to be endogenously determined by credit growth. You would have to tie the ideal money supply growth to some current variable determined by some measurement. Once that is the case then you lose the truly independent nature of the currency because the number (be it inflation or NGDP or whatever) would be suseptible to influence.

Just implement a wage growth target instead no need for the cryptocurrency.

Never underestimate bureaucratic inertia

Another reason it is implausible is that if Yellen really does preside over strong economic growth it is unlikely that a Republican would win the 2016 election; it is also unlikely that a modern GOP President would re-appoint a Democratic Fed Chair regardless of elite consensus or objective performance.

Liu was one of the 31 migrant workers elected to the National People's Congress last year. She is a foot masseuse in southeast China's Xiamen City. A native of south China's Anhui Province, Liu was a school dropout at the age of 14 and worked to support the schooling of her siblings.

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