Fedcoin? Global financial watchdog says central banks may need ‘digital alternative to cash’

On the latest quarterly review of the Bank for International Settlements, it was said that central banks might one day need to issue cryptocurrencies of their own.

“Whether or not a central bank should provide a digital alternative to cash is most pressing in countries, such as Sweden, where cash usage is rapidly declining,” said the Sunday report. “But all central banks may eventually have to decide whether issuing retail or wholesale [central bank cryptocurrencies] makes sense in their own context.”

The argument of the report in favour of digital currencies stems from two needs: efficiency for institutions and anonymity for consumers.

Cryptocurrencies like bitcoin, for example, do not need a third party to verify transactions, which are essentially instantaneous and irrevocable because of the blockchain technology of the currencies.

Forms of money from the past, present and possible future

The report comes are regulators are still divided as to whether to officially accept digital currencies like bitcoin as currencies or commodities, if the institutions consider such a designation valid at all.

The report noted that Singapore, Russia, and some other central banks had revealed experiments with digital currencies, while some other researchers have suggested central banks tokens such as Fedcoin. The bank has also pointed out that Fedcoin was not endorsed by the Federal Reserve and no central bank has launched a retail or wholesale-use digital currency officially.

However, the exponential surge of bitcoin from a few cents several years ago to around $4,000 caught the attention of Wall Street. Presently the 14-page report of the Bank for International Settlements chose to look at digital coins through four properties of money: form, issuer, accessibility, and transfer mechanism.

A central bank cryptocurrency was then defined by the report as  “an electronic form of central bank money that can be exchanged in a decentralised manner known as peer-to-peer, meaning that transactions occur directly between the payer and the payee without the need for a central intermediary.”

In July, Francisco Blanch, the commodity and derivatives strategist at the Bank of America Merrill Lynch, said in a report that bitcoin still faces a lot of challenges in becoming a currency that is globally accepted. Blanch said that the “crucial hurdle” is whether major financial institutions will accept the digital currency as collateral.

To be certain, extreme caution is guaranteed for central banks wading into cryptocurrencies. Ethereum and bitcoin, the most well-known digital currencies have been very volatile and were sometimes struck by major attacks.

“Some of the risks are currently hard to assess,” said the report. “For instance, at present very little can be said about the cyber-resilience of [central bank cryptocurrencies], something not touched upon in this short feature.”