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The economic research arm of the Federal Reserve Bank of St Louis has released a paper entitled The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies”, which presents some surprisingly progressive thoughts on the nature of Bitcoin and other cryptocurrencies and their place in the financial sector.

The paper primarily deals with the concept of saving outside the financial system. Before the rise of cryptocurrencies, cash (or similarly, gold) was really the only way in which someone could save without interacting with a financial institution such as a bank. They do make a certain distinction between cash and gold, however, and that distinction is liquidity:

Cash is also the only liquid asset for saving outside of the private financial system. By liquid we mean an asset that can be directly exchanged for goods and services. Gold, for example, is also a means for saving outside of the private financial system. However, according to our definition, it is not liquid because it cannot be exchanged directly for goods and services (in most cases).”

Functions of cash that they see analogous to cryptocurrencies include its anonymity functions as well as it’s lack of a ‘credit relationship’. Cash transactions can be used to engage in trade between parties that do not trust each other, as all debt related is immediately settled upon exchange of cash. The problem for cash, though, is that both parties need to be present for trade to take place.

The paper puts forward a case for Bitcoin as a means of facilitating the need for a completely liquid asset that operates outside of the traditional financial sector, and is digital, so that it is practical for online commerce.

We believe there is great demand for a virtual asset issued by a trusted party that can be used to save outside of the private financial system.”

The authors go to great length to explain that while it could be very easy for a central government to issue its own cryptocurrency (crypto-fiat), in doing so would completely undermine the decentralization by which cryptocurrencies such as Bitcoin are built on.

The distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access… we argue that it makes little sense for central banks to issue cryptocurrencies even though it would be straightforward from a technological point of view to do so.”

They reason that the concept of crypto-fiat is self-defeating, in that if a cryptocurrency issued by a central bank was to be anonymous in nature, it would open that central bank up to all kinds of liability issues. They even went so far as to call pleas for a “fedcoin” or other central bank cryptocurrencies “naive”. KYC (know-your-customer) and AML (anti-money-laundering) controls are the antithesis of cryptocurrencies, they posit:

History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments. The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.”

Sentiment such as this, coming from an institution such as the Federal Reserve of St. Louis, is nothing but refreshing given the current overarching political attitude coming from the US towards cryptocurrencies.

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