On the (Un)Feasibility of Fedcoin: Implementing a Central Bank Backed Digital Currency in the United States

Abstract

The rise of cryptocurrencies has sparked a global discussion on central bank backed digital currencies (CBDCs). In a 2014 blog post, J.P. Koning proposed that the Federal Reserve launch its own blockchain based digital currency: Fedcoin. While the technology behind cryptocurrencies was supposed to liberate monetary policy from central bank control, it might instead be the key to strengthening the Federal Reserve’s power. In the post-crisis era of excess reserves and low inflation, the Federal Reserve’s traditional monetary policy tools of open market operations and reserve requirements break down, leading to a dependence on new or unconventional policies such as quantitative easing, forward guidance, and the interest rate on reserves. Fedcoin could be a powerful new monetary policy tool which gives the Federal Reserve a direct transmission mechanism by setting interest rates on Fedcoin – a tool which many have touted as a solution to the zero-lower bound. Many impediments stand in the way of Fedcoin’s implementation, however, including the Mundell-Fleming policy trilemma, dependence on cash in the United States, displacement of the banking sector, and the Federal Reserve’s statutory mandate.

This paper looks at law, economics, and technology to discusses Fedcoin design considerations, including:

1) the desirability and mechanics of implementing Fedcoin as a DLT-based token,

2) the monetary policy implications under economic theory,

3) feasibility of Fedcoin’s adoption and moving towards a cashless society and

4) the Federal Reserve's statutory authority to create a digital currency.

Keywords: Bitcoin, Blockchain, DLT, Distributed Ledger, Fedcoin, Digital Currency, Central Bank Backed Digital Currency, CBDC, Monetary Policy, Mundell-Flemming, Cashless, Zero Lower Bound, ZLB, Inflation