Fed Exec Floats Idea for Government-Backed Virtual Currency (Feb. 9, 2015)
As bitcoin and other virtual currencies remain subject to heavy scrutiny—and proposed regulation—by various government agencies, a senior Federal Reserve researcher is raising the possibility of the government creating a virtual currency of its own. In a recent blog post, David Andolfatto, senior vice president and director of research for the St. Louis Fed, described what he termed “Fedcoin,” a Federal Reserve-sponsored virtual currency he claimed would solve one of the major problems with bitcoin and other virtual currencies—their high rate of volatility. (The blog is his opinion and not that of the Federal Reserve.) By controlling the issuance of both Fedcoin and traditional currency, Andolfatto argued, the Fed could reliably fix the exchange rate between the virtual currency and U.S. dollars, precluding the wild swings in value that have plagued bitcoin. The currency now trades at around $220, a huge drop from its high of $1,242 in late 2013. Such volatility leads to high risk for sellers that earn revenue in bitcoin, but have to pay obligations in dollars, he noted. A Fed-managed virtual currency, on the other hand, would be much more stable; the Fed could issue as much of either currency as needed to maintain the desired rate.
Along with increased stability, Fedcoin would maintain all of the existing benefits of bitcoin and other virtual currency: low-cost, P2P transactions to anyone in the world with Internet access and the appropriate wallet software, with no need for an “onerous application process,” according to Andolfatto. And while some lawmakers and regulators have voiced concerns over virtual currencies being used as a tool to finance illegal activity, Andolfatto argued that virtual currencies do in fact leave a “digital trail,” making such transactions easier for law enforcement to trace than cash exchanges.
Andolfatto’s blog post followed a presentation he gave on Jan. 29 at the International Workshop on P2P Financial Systems, in Frankfurt. You can watch the full presentation here. And for a video introduction to blockchain, the technology behind bitcoin—and potentially much more—click here.
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