Is The US Heading Toward A Cashless Economy Via Blockchain?
The US Federal Reserve along the central banks of other nations' are exploring the creation of state-backed digital currencies that would allow consumers and businesses to have digital wallets from which they could buy, sell and trade.
A former Federal Reserve executive believes it's only a matter of time before central banks adopt a form of digital currency that could look like Bitcoin, and will offer a more convenient and anonymous way for businesses and consumers to buy and sell goods and store wealth.
What is Blockchain?
Blockchain is poised to change IT in much the same way open-source software did a quarter of a century ago. And in the same way that Linux took more than a decade to become a cornerstone in modern application development, Blockchain will take years to become a lower cost, more efficient way to share information between open and private networks. But the hype around this seemingly new, secure electronic ledger is real.
In essence, blockchain represents a new paradigm for the way information is shared and tech vendors and companies are rushing to figure out how they can use the distributed ledger technology to save time and admin costs. Numerous companies in 2017 began rolling out pilot programs and real-world projects across a variety of industries, everything from financial services to healthcare to mobile payments and even global shipping.
The Cashless Economy
The advent of a government-backed, peer-to-peer (P2P) digital currency would likely be based on a blockchain-based electronic ledger, and it could signal the beginning of a cashless economy, not unlike what's occurring today in Sweden. It also may simply complement the modern-day current cash-based system.
The percentage of cash in circulation as a function of Sweden's gross domestic product has fallen dramatically in recent years; cash now represents less than 1.2% of that nation's GDP.
"So cash is really disappearing in Sweden. It's not accepted at many businesses and many banks won't deal with cash anymore," said Rod Garrett, an economics professor at the University of California at Santa Barbara.
Garratt, formerly a vice president with the Federal Reserve Bank of New York's Money and Payment Studies Division, spoke at the "Business of Blockchain" conference at MIT in Boston last month.
"I think there is a likelihood that some type of digital central bank money will become available in the reasonably near future because I think it’s a natural progression. It’s something that’s been talked about for a long time," Garratt said.
Last year, Garratt worked as a digital currency technical advisor to the Bank of International Settlements (BIS) in Switzerland. The BIS, whose purpose is to foster cooperation between central banks around the globe, has been exploring the role crypto-currencies could play if nations begin backing them.
While the prospect of a government-backed digital currency that also provides anonymity may seem is far-fetched, Garratt noted that cash, too, is essentially a P2P process.
"It might sound strange to think about the central bank providing something that allows anonymity from itself, but that’s what cash is," Garratt told attendees at the MIT event. "So, it’s not such a crazy thing."
A government-backed digital currency could do away with banking fees that often target the poor who make many small, electronic payment transfers via services such as Western Union, while at the same time creating greater efficiencies. For example, the time it takes to clear and settle funds, could be greatly reduced, with crypto-graphics used to ensure privacy. Crypto-graphic keys controlling funds could be in a consumer's control; the consumer could be issued a private key associated with their electronic funds and be able to use public keys for payments.
Sweden's central bank, The Riksbank, is currently considering issuing a digital currency or crypto-currency similar to Bitcoin for mobile payments.
Called the e-Krona, the digital currency would be used for smaller payments between consumers, businesses or with government agencies, and it would create safer and more efficient transactions, the government has argued. In 2015, Ecuador created the world's first state-sponsored digital currency, called Sistema de Dinero Electrónico (electronic money system), which was backed by the central bank; it allowed people to have money in accounts that could be traded on their phones. Ecuador, however, shuttered its electronic money system last year "due to lobbying by the banks," Garratt said.
"They're pushing hard, as many countries are, for using distributed ledgers – using blockchain – to implement their own domestic digital token," Brian Behlendorf, executive director of the business Blockchain collaborative.
One idea originally floated by blogger J.P. Koning is called Fedcoin, a bitcoin-like currency based on blockchain that would offer a 1:1 ratio between a US dollar and a digital token.
While blockchain is the foundation for cryptocurrency, it is not anchored to digital currencies. Blockchain distributed ledgers are used for a myriad of business applications, such as authenticating real estate transfers or for digitising supply chains or tracking international shipments in real time.
Robleh Ali, a digital currencies research scientist at the MIT Media Lab, said a government-backed digital currency wouldn't necessarily have to exist on a distributed ledger, as bitcoin does today. It could be centrally administered by the Federal Reserve and other central banks.
The question central banks need to ask themselves is what are they trying to accomplish, he said.
"Do we want a token that can integrate with this new token economy? Then they may want to use an architecture that's similar to those bitcoin tokens to issue fiat money," Ali said.
In 2013, Garratt was involved in a multi-bank proof of concept called Project Jasper, which explored the use of blockchain as the basis for a new bank-to-bank digital payments system for large monetary transfers. So, for example, if a homeowner were to sell their house, banks could use the electronic distributed ledger to settle the transfer of funds. If the Federal Reserve or other central banks were to back digital currency, it could take on many forms. For example, it could be operated as a closed system between banks for large money transfers, such as those used for daily clearance and settlement of thousands of smaller transactions. Or, it could open central bank accounts available for any consumer's use, a type of virtual bank account.
The Fed could also issue a digital coin, similar to bitcoin, that would represent the stored value of fiat money. While a government-backed digital currency offers potential, it would also complicate monetary policies because central banks would have to manage and monitor cash reserves. Creating a token economy also raises difficult questions about whether it would disintermediate commercial banks.
"Banks provide a valuable service in our economy. All productive enterprises in our economy typically work through commercial banks. We don't want to necessarily take that all away," Garratt said. "That doesn't mean that there isn't a role for central banks to provide a digital form of currency that would in some ways compete with traditional currency on equal footing. I don't think there's anything antithetical to the idea of a central bank providing this."
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