Central banks are planning to launch a new form of digital currency as governments and banks begin phasing physical cash currency out of circulation.
Central banks are planning to implement a new form of currency that has the potential of being an even more profound change than 1913, 1933, 1945, or 1971. I discussed an option that the government and banks might use to get us out of the monetary mess we find ourselves in, it was called the E Dollar. The E Dollar is simply a digital currency that has an exchange rate with cash. The central bank would set a rate at which old paper dollars would lose value against E Dollars held in a bank account. Under an E-Dollar system any physical cash removed from the banking system would lose value against the E Dollars retained in an account, this would effectively eliminate the zero lower bound. Central banks would be free to implement significantly negative rates. The E Dollar would also a carry the added optional benefit of a gradual debt jubilee if the powers that be decided to allow old debt to remain denominated in old dollars.
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When I saw the E Dollar as a possibility, Miles Kimball, an Economist from the University of Michigan, was the only other person around who was discussing it, and he had started presenting the concept as an option to central banks. In reality he was breathing life into an old concept with the digital age. Economist Robert Eisler floated a similar idea during the Great Depression, only it was to be maintained with a ledger system by banks and retailers. The computer age makes the concept that much easier. I tacked on to his idea that the new E Dollar could be a cryptocurrency, eliminating the need for keeping the digital currency in a bank account, instead being maintained in digital wallets. It is always easier to sell something new rather than something old and blockchain technology is certainly a relatively new innovation. The concept of electronic cash has actually been investigated by the government for some time, and I think the circumstantial evidence that bitcoin is a beta test for such a system is compelling.
I am no fan of this plan since it maintains the unbreakable covenant of shifting monetary systems of the last century, the banks and government gain power, but this is is precisely why such a concept has a following sea. Still when initially writing about the E Dollar I saw the possibility of it coming to fruition as pretty slim. After a string of recent events that possibility has increased exponentially.
First, for the old news. At the time of writing the History and Introduction only one central bank had introduced modest negative rates, Switzerland. Since then, as most know, Sweden, Denmark, the ECB, and most recently Japan, have joined the party, but negative rates are only one piece of the E-Dollar concept puzzle. The latest is how major central banks are considering direct issuance of cryptocurrencies.
There was recently a meeting held in Beijing with representatives from the Peoples Bank of China, including Governor Zhou Xiaochuan, where the creation of an E Yuan was discussed. The official statement is in Chinese but online translation makes their intent clear enough. China would like to “set up clear strategic objectives for digital currencies issued by the central bank, and develop key technologies and applications aimed at an early launch of a digital currency issued by the central bank.”
One of their stated goals is more control over capital flows; imagine that, a totalitarian government wanting more control over its people. Hao Hong, chief China strategist at the Bank of Communications said “[China is] facing capital outflow pressure, a digital currency would make it easier to check the capital flow.” As previously posted, countries would likely need political cover that a crisis would afford to make a move toward an E Dollar Concept, and it would appear China is not letting this latest crisis go to waste. Citigroup has been researching the concept for the PBOC and would help implement it.
We also recently discussed how one of the most influential economists in the world, Andy Haldane, Chief Economist at the Bank of England, suggested an E Pound Concept In September.
Well it appears the BOE is continuing in its quest. BOE economists Michael Kumhof and John Barrdear wrote a paper in which they “Explore the macroeconomic consequences of central banks themselves issuing digital currency in sizable amounts, in direct competition with privately-issued bank deposits.” I found this quote interesting in that it almost appears as if they are setting up the E Pound as an adversary to traditional bank created money, but I digress. Preliminary findings of the paper for a central bank digital currency include “A sizable increase in steady state level GDP” and “stabilize the business cycle by granting policy makers additional policy instruments that controls either the price or quantity of government provided liquidity.” Additional policy instruments huh? You wouldn’t mean significantly negative rates and banning cash would you?
Finally, and here’s the big one, In January of 2015 David Andolfatto the vice president of the Federal Reserve Bank of St Louis said the following during a presentation:
“This opens up the door for some innovation; potentially the government or some government agency can step in and be more efficient than the private sector, and I’ll defend that statement as well, the notion is Fedcoin, which is a term not original with me, its something I came across in the blogosphere. Jacob Combing was the first to coin the term, but basically what this is is the idea of combining the bitcoin payment system, or the protocol with the US dollar.” Minute 1:30-2:30
He discusses why bitcoin is a bad form of money in minutes 23:00-30:00, and later says:
“We believe that the fed can maintain the fixed exchange rate system [between the currencies] because the fed [would] ‘print’ both types of currency, and no other private sector [entity] can print dollars, giving the Fed a comparative advantage”
If the Fed can maintain a fixed exchange rate, they can vary the exchange rate as well.
He also wrote a blog post on the subject in which he wrote the following interesting excerpts:
“And so, here is where the idea of Fedcoin comes in. Imagine that the Fed, as the core developer, makes available an open-source Bitcoin-like protocol (suitably modified) called Fedcoin. The key point is this: the Fed is in the unique position to credibly fix the exchange rate between Fedcoin and the USD (the exchange rate could be anything, but let’s assume par).”
The Exchange rate could be anything huh?
“What justifies my claim that the Fed has a comparative advantage over some private enterprise that issues (say) BTC backed by USD at a fixed exchange rate? The problem with such an enterprise is precisely the problem faced by countries that try to peg their currencyunilaterally to some other currency. Unilateral fixed exchange rate systems are inherently unstable because the agency fixing the BTC/USD exchange rate cannot credibly commit not to run out of USD reserves to meet redemption waves of all possible sizes. In fact, the structure invites a speculative attack.” He seems to be vilifying bitcoin as inviting attacks from the ever evil speculators.
This statement goes back to my comments in The History and Introduction, that when the time comes they will point out all of the flaws in bitcoin, which they have fixed with the E Dollar/Fedcoin. My original text from ’14: “At the same time they could say, as in the congressional testimony, that bitcoin had many benefits but was too dangerous without oversight. But with the introduction of a US crypto currency, the E Dollar, all of those benefits would be realized without the risk, because of additional regulation and safeguards.”
He goes on:
“First, the Fedcoin protocol could be made open source, primarily for the purpose of transparency. The Fed should only honor the fixed exchange rate for the version of the software it prefers. People can download free wallet applications, just as they do now for Bitcoin. Banks or ATMs can serve as exchanges where people can load up their Fedcoin wallets in exchange for USD cash or bank deposits.”
“From the perspective of the Fed, because Fedcoin can be viewed as just another denomination of currency, its existence in no way inhibits the conduct of monetary policy (which is concerned with managing the total supply of money and not its composition). In fact, Fedcoin gives the Fed an added tool: the ability to conveniently pay interest on currency.”
Or conveniently charge interest, through negative rates, as is going on throughout the world, and the Fed considers as a possibility ( I would call it an probability) in the future. Let’s not forget this is a St Louis Fed official, the same St. Louis Fed that wrote a paper indicating that QE doesn’t work, and when at the zero lower bound the only option to ease monetary policy besides QE is negative rates.
Mr. Andolfatto hits on a couple of my points made as to why the government would love the E-Dollar Here:
“In short, Fedcoin is essentially just like digital cash. Except in one important respect. Physical cash is still a superior technology for those who demand anonymity (see A Theory of Transactions Privacy). Cash does not leave a paper trail, but Fedcoin (and Bitcoin) do leave digital trails. In fact, this is an excellent reason for why Fedcoin should be spared any KYC restrictions. First, the government seems able to live with not imposing KYC on physical cash transactions–why should it insist on KYC for digital cash transactions? And second, digital cash leaves an digital trail making it easier for law enforcement to track illicit trades. Understanding this, it is unlikely that Fedcoin will be the preferred vehicle to finance illegal activities.”
He ends with this:
“Finally, the proposal for Fedcoin should in no way be construed as a backdoor attempt to legislate competing cryptocurrencies out of existence. The purpose of Fedcoin is to compete with other cryptocurrencies–to provide a property that no other cryptocurrency can offer (guaranteed exchange rate stability with the USD). Adopting Fedcoin means accepting the monetary policy that supports it. To the extent that people are uncomfortable with Fed monetary policy, they may want to trust their money (if not their wealth) with alternative protocols.”
Because why would you want to stop the E Dollar/Fedcoin Beta test to early when you are still gathering good information and research from it?
Below is Mr. Andolfatto’s presentation on Fedcoin.
There have been plenty of stories in the alternative financial media on cash bans, negative rates and debt jubilees, but none about doing it in one fell swoop with an E Dollar concept. Just doing a cash ban and negative rates would not be as effective as an E Dollar as covered here but additionally terms like cash ban, negative rates and debt jubilee could have some very negative connotations with the public. The E Dollar/Fedcoin on the other hand could be sold as innovation, and who wants to stand in the way of progress. The millennial generation, of which I am a member, could easily accept the new cryptocurrency and blow off naysayers as just “not getting it”.
I have not changed my mind on holding a small allocation to bitcoin, but as the loathsome Jamie Dimon points out it is vulnerable and he has a valid point. Even Gavin Andresen, a bitcoin core developer, in an interview with Chris Martenson, indicated that if a government created a cryptocurrency similar bitcoin, supported by tax collection and legal tender laws it would have clear advantages over bitcoin, and would take back market share. That said, Bitcoin has proven that it reacts well to monetary turmoil and there may be wonderful trading opportunities in what I believe is going to be a very tumultuous decade to come. This opportunity may be fleeting, a time between when people rush to the cryptocurrency for safety while fiat currencies are faltering, but before it is outlawed.
It’s about time we start paying attention to the clear trend toward a possible E-Dollar/Fedcoin, it’s consequences, and how to position ourselves accordingly.