Here are our thoughts on Fedcoin.The full text is also below.
USD 2.0 – WOULDN’T THAT BE GREAT?The world desperately needs technologies like Fedcoin. Money has fallen far behind advances in technology. We endure levels of monetary friction that predate the information age. Half of the world’s adult population, 2.5 billion people are unbanked, yet desperately need access to modern financial services. These billions remain unbanked because it’s too expensive to give them accounts, and despite the best efforts of extremely well funded organizations and the smartest individuals in the world, nothing seems to change. This situation is entirely caused by an arranged marriage between our monetary systems and outdated sets of rules that trace their origins to the days when we knew the earth was flat. Most of the rules we follow in 2015 were created before people used computers, yet we seem surprised that an international money transfer costs the poorest people 8-10%. You can email someone halfway around the world in seconds for free, but a wire will cost you $50 and take 3-5 days. We are living in the dark ages of money.
RULES? IT’S ALL ABOUT FOLLOWING THE RULES.The rules different Governments apply to monetary systems are so demanding that only well funded financial institutions can afford to follow them. End users of the currency must open “accounts” with these institutions in order to participate, and there is no universal standard for transmitting money between these financial institutions globally. Standards in the same Country vary widely. This complicated global regulatory framework is why we suffer from unacceptably high fees when sending money overseas or between banks. A Fedcoin technology could, if properly designed, eliminate this friction entirely and allow anyone interested to essentially “download a bank”. That said, it’s difficult to not be a skeptic. There are three major issues standing in the way of mass adoption of a Fedcoin like technology.
ISSUE 1: FEDCOIN REGULATORY INCOMPATIBILITYThe first major issue with Fedcoin has to do with regulatory incompatibility. The Bank Secrecy Act and similar regulation require anyone moving money to comply with strict sets of record keeping and monitoring requirements. These requirements exist to ensure that money is not transmitted to individuals or entities that are on sanctions or other lists or for reasons considered illegal or otherwise prohibited. These rules and the institutions that enforce them will never allow the download of an application that lets users send and receive US dollars anonymously. There will be a requirement for users of the software to be identified first, creating a network of ID verified individuals who are allowed to transmit funds. This alone introduces cost and friction, as some entity, likely a company or companies, must positively identify users of the software. There will need to be processes to revoke licenses for users that are added to lists of unapproved users. Identity thieves will create false users, and the same arms race that exists today between banks and organized criminal identity thieves will continue as it does in today’s system. So while we may see a consistent system for money transmission, we will still see the same hurdles around identity management that exist today. These requirements around ID will also make it economically nonviable to let the poorest people use the Fedcoin software. Half of the world’s adult population, 2.5b people are unbanked today, and without a consistent standard for individual ID, Fedcoin with ID requirements won’t be able to help these people. Today banks and other financial institutions exist because they are able to comply with these rules cost effectively. Fedcoin as proposed fails to automate all of the complicated and often inconsistent rules that apply to financial institutions, which means that these same institutions would still need to exist to ensure compliance, regardless of whether Fedcoin software is used to transmit money or not.
ISSUE 2: FEDCOIN CENTRALIZATION AND HUMAN NATUREThe second major issue with Fedcoin relates to monetary policy and the nature of the technology. While decentralized cryptocurrencies issue new currency units based on predictable math based rules and prevent counterfeiting though economic incentives offered to miners, Fedcoin would be directly connected to US monetary policy and those controlling it. While many see this as a positive, as the US dollar presently experiences lower volatility than bitcoin and similar cryptocurrencies, it fundamentally changes one of the key beneficial properties of decentralized cryptocurrency, a predictable and transparent monetary policy that is not subject to human error. The average lifespan for fiat currency is 27 years. The Great British Pound is the longest lived currency today, surviving well over 300 years, yet when it was conceived, the GBP was fixed in value to one pound of sterling silver, and has lost well over 99% of its value in those 300+ years through inflationary monetary policy. The US dollar enjoys status as the world’s reserve currency today and is typically the unit of account for trading oil, but this status is closely tied to geopolitical power. This is not to say that the US dollar will not continue to enjoy its status as the most widely used currency in the world, but history indicates that the lifespan of even the greatest currencies comes to an end. In 2008 we came right to the edge of a serious global currency crisis that was narrowly averted. This pattern of financial crisis is predictable and happens roughly every 10 years or so. When studied, there is a common theme behind them. Human decision making typically caused by greed created financial imbalances that built upon themselves resulting in a crash. Compare this history with bitcoin or other cryptocurrency with math based monetary policy where inflation is predictable and limited. These rules are not based on human decision making and value is tied to its effectiveness as a medium of exchange, not the backing of a sovereign government of elected or appointed individuals. This makes bitcoin much like digital gold, another form of currency accepted across borders and cultures universally for thousands of years. Bitcoin has survived for over 6 years and has yet to be hacked or compromised. It looks increasingly likely that issues around scale will be overcome as computer storage costs drop. This makes bitcoin an ideal “neutral ground” for money transfer across powers that may or may not see eye to eye. This is the other side of the coin in terms of the volatility argument against bitcoin, it has superior properties as money and a built in neutrality that insulates itself from politics. The coin has been flipped and time will tell if its heads or tails.
ISSUE 3: CONFLICT OF INTERESTThe third major issue with Fedcoin is that it conflicts with the best interests of banks. Banks that do not directly profit from the creation of money stand to lose with Fedcoin, as lending activities could easily become obsolete and automated by the software. Beyond credit, Fedcoin would make money transmission effectively free, which would remove most if not all income from remittance and payments services. These are other profit centers for banks and financial services companies. The lobbying against this type of technology will be fierce and unprecedented, the stakes could not be higher, and these institutions are very good at getting their way. I believe that Fedcoin’s only chance is that if that all incumbents are sufficiently threatened by an even more disruptive technology, such as bitcoin. I don’t think bitcoin represents an existential threat to these institutions at this time, and as long as taxes must be paid in local currency, it’s unlikely it ever will.
CONCLUSIONThese are very early days, but it’s clear that bitcoin and Fedcoin are fundamentally different technologies with very different properties and value to end users. Bitcoin is a decentralized form of electronic cash that exists without a central authority and is widely used today. Fedcoin is a derivative idea that represents a standardization of the technology behind transmitting US dollars. Fedcoin carries the pros and cons of the underlying currency and is more of a transmission standard than a new form of cash. Fedcoin would be a wonderful improvement over today’s payment systems, but it’s highly unlikely we’ll ever see it in general use. Banks in the US can’t even agree to modernize the ACH system. This system is still used as the primary method to move money inside the US, was conceived in 1974, and runs on a batch system that is manila folder friendly. The backbone of the US financial system is about as fast as the Pony Express because we can’t agree to a defacto real-time settlement system, yet we are going to implement an even more advanced Fedcoin technology and hold hands while singing campfire songs and roasting marshmallows? Forget it, there are just too many complications and unaligned forces that have a say in the matter for this idea to work. It will take an existential threat in order to align these forces and create real change. That threat is not bitcoin. That threat is destabilization of the system itself. The root cause of this threat won’t be a new technology, it will be good old fashioned greed.
