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Fedcoin: A Possible Government-Backed Cryptocurrency

Bitcoin has been hailed as the future of currency but its detractors say its doomed to failure and extreme volatility because of its lack of regulation and state backing. Now economists are considering an alternative federally backed cryptocurrency fixed to the U.S. dollar, dubbed Fedcoin.

David Andolfatto, an economist for the Federal Reserve Bank of St. Louis, published a blog post on Feb. 3 outlining his vision for a possible government endorsed digital currency entitled "Fedcoin: On the Desirability of a Government Cryptocurrency."

The blog post is based on a presentation Andolfatto gave earlier at the International Workshop on P2P Financial Systems 2015.

The key difference between Andolfatto's Fedcoin and cryptocurrencies like bitcoin is that it would have a fixed exchange rate with the U.S. dollar. This would solve what many say is bitcoin's main problem -- its volatility.

Bill Gates pointed out in a recent Reddit AMA that he likes bitcoin but his foundation cannot use the currency for a basic reason. "The poor shouldn't have a currency whose value goes up and down a lot compared to their local currency," he stated.

The Fedcoin blog post proposes that the currency would be developed and managed by the federal government: "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)."

Essentially, Fedcoin would be just a digital denomination of the U.S. dollar but with lots of the advantages of bitcoin -- low cost and peer-to-peer transactions to anyone in the world with the appropriate wallet software and access to the Internet.

Critics of the idea could argue that the entire point of a currency like bitcoin is that it is not linked to a state-run currency and could promote an economy not controlled by governments. Andolfatto is not suggesting that Fedcoin be used as an excuse to ban current cryptocurrencies, but rather it could be launched as a competitor offering more stability than the likes of bitcoin.

Ecuador has become the first country to launch a digital currency fixed to the dollar and the Philippines are said to be considering a similar move. The debate over who should control the currencies of the future will no doubt continue, but with many like Bill Gates worried about the volatility of bitcoin, a proposal like Fedcoin is certainly worth serious consideration.

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