The idea of government-created and -backed cryptocurrencies has been around since the earliest days of bitcoin (BTC). But as crypto has captured the public’s imagination over the past year, the actions and public statements of central banks around the globe are drawing greater attention from proponents and critics alike.

In May, former Federal Reserve governor Kevin Warsh, a finalist to be President Trump’s Fed chair, said he would have explored creating a so-called “fedcoin had he been appointed.

“Not that it would supplant and replace cash,” he said, according to The New York Times.But it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy.”

One benefit of a central bank-backed cryptocurrency is its value could  be tied to a fiat currency, helping ensure a more stable measure of value that could speed its adoption.

The exact role of a fedcoin is the subject of much debate, but a few things are becoming more clear.

1. Cryptocurrencies and fiat currencies already have a lot in common.

Cryptocurrencies, critics say, have no intrinsic value beyond the perception that they will hold their value. But the same could be said for fiat currencies in a world that has left the gold standard behind.

Don’t take our word for it, that’s what a U.S. Federal Reserve Bank leader said just last month.

“Currency is an intrinsically worthless object that has value in equilibrium only because people think it will be accepted in future trades,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during Consensus 2018.

Through that lens, a fiat currency with unstable monetary policy and a cryptocurrency that forks to increase the total quantity of coins could lose credibility in similar ways.

One benefit of a central bank-backed cryptocurrency is its value could be tied to a fiat currency, helping ensure a more stable measure of value that could speed its adoption. But in the absence of fedcoins, a growing number of so-called “stablecoins” have filled the void, claiming to be backed by fiat currency without the central bank imprimatur.

2. Cryptocurrencies could help central banks do their job, or put them out of one.

During recessions, federal banks often stimulate the economy by injecting cash, essentially creating money out of thin air to keep it circulating. Some observers argue that a fedcoin could make that job even easier.

“Worried about deflation in a recession? A national cryptocurrency such as fedcoin would be able to operationalize [Nobel Prize-winning economist] Milton Friedman’s famous ‘helicopter cash’ [actually, “helicopter money“] as an alternative strategy to stimulate the economy,” writes Duke University finance professor Campbell R. Harvey. “A single line of code could instantly put $1,000 into every person’s wallet.” 

For central banks, there’s a flip side to what happens if cryptocurrencies become widely used in the absence of a fedcoin: They could dilute the impact of monetary policy, weakening the Fed’s ability to tweak the economy. That’s the argument made by Dong He in an International Monetary Fund publication in June, comparing the impact to “dollarization“ or the limited impact of local currency shifts in developing nations where most financial activity is connected to the dollar.

“If central bank money no longer defines the unit of account for most economic activities—and if those units of account are instead provided by crypto assets, then the central bank’s monetary policy becomes irrelevant,” writes Dong He, who is deputy director of the IMF’s monetary and capital markets department.

3. Central banks are clearly interested in the technology, if not the currency.

Along with managing the money supply, central banks and their payment systems are responsible for keeping economies flowing. It’s no secret that across the world these banks are exploring the underlying blockchain technology as a means of improving those systems. For example, the Bank of England is experimenting with how distributed ledger technology could affect its settlement service, while the Monetary Authority of Singapore and major commercial banks have developed prototypes for interbank settlements.

And while Warsh wasn’t Trump’s appointee to run the Fed, current Chair Jerome Powell has expressed interest in how blockchain could affect wholesale payments.

4. Some countries are becoming cashless, and that worries some people.

Fedcoin is a source of anxiety for many privacy advocates, and there’s a clear line connecting the critics of centrally issued cryptocurrencies to longstanding concerns about governments eliminating cash. To be sure, central banks have cited the ability to track financial transactions as a way to address everything from terrorism to tax evasion, but concerns about privacy in a cashless future have evolved into hypothetical scenarios involving the outright seizure of cash and social engineering, such as barring overweight people from purchasing sweets with their fedcoins.

These concerns are being stoked by the usual suspects, including goldbugs and other speculators, but the reality is that some countries are moving in the direction of going cashless. The European Central Bank eliminated the 500 euro bill in 2016, citing its use by nefarious actors. In Norway, where some banks have stopped handling cash because so few people use it, the country’s central bank is exploring cryptocurrency as a reaction to changing consumer preferences.

But cash is still king. A 2017 study by the European Central Bank found that 79 percent of retail transactions in the eurozone were still conducted with cash.

5. It’s not just the Fed and not just central governments and their banks.

One thing that’s clear is the first fedcoins won’t involve the U.S. Federal Reserve Bank. 

However, earlier this year, Venezuela drew attention by creating a petro cryptocurrency that is backed by oil reserves, not its own beleaguered fiat currency. Estonia’s attempts at creating a national cryptocurrency — the estcoin — have been scaled back after the European Central Bank objected to having an alternate to the euro within the borders of the European Union.

The Marshall Islands may win the crown as the first country to create an official cryptocurrency. The South Pacific atoll’s sovereign, or SOV, was approved in March and would have equal status with the U.S. dollar, the nation’s default currency. President Hilda Heine called it “a historic moment for our people.”

Back in the United States, a New York lawmaker introduced a bill this month that, if signed into law, would allow up to 10 pilot digital local community currenciesessentially town-scaled fedcoins designed to encourage residents to shop locally. “More members of the younger generation are not only familiar with but expect widespread use of blockchain and technology,” the bill states, echoing a shift that ultimately may have an impact on currencies across the world.

Mark Toner
Mark Toner is a Washington, D.C., writer and editor. He has covered business, technology, media, education, and healthcare for a wide range of trade and industry publications.