St. Louis Fed Sees No Point in Central Banks Creating Monopoly Cryptocurrencies

In the world of cryptocurrency, there is a fair amount of competition as of right now. Until very recently, it seemed central banks would get in on the action as well, yet they have decided not to pursue this option any longer. A new report by the St. Louis Fed states that cryptocurrency developers are “welcome to create anonymous forms of money”. It’s a surprising line in an otherwise standard report.

Anonymous Cryptocurrencies Get Positive Remarks

Truth be told, the report by the St. Louis Fed is pretty interesting. It touches upon the concept of cryptocurrencies and how central banks should play no active role in this area. Various financial institutions have made it clear they will no longer pursue this avenue in the future, and it seems there is a very good reason for doing so. Decentralization of transaction handling is not something central banks can actively engage in, nor should they.

The report mentions how it makes little sense for any central bank to issue its own cryptocurrency. While it may make sense in theory, reality often works out in a completely different manner. Embracing an existing token standard, such as ERC20, would be all too easy for a bank. They could even attach value to such tokens by pegging them to existing forms of money, precious metals, and the like.

The key characteristics of cryptocurrencies are a big problem for central banks. There is zero incentive for a central bank to introduce its own digital currency at this stage, especially not if that currency were to possess anonymity traits. While cash is also anonymous to a certain degree, a digital currency could take this concept a few steps further. Developing such a currency would impose reputational risks upon central banks, which is not something any institution should engage in.

Instead, developing anonymous cryptocurrencies is a process best left up to cryptocurrency developers. A central bank issuing its own version of Monero or Dash would also offset a lot of existing regulations. Commercial banks adhere to strict AML and KYC guidelines. If a central bank were to undermine their efforts by creating an anonymous cryptocurrency, a very interesting, albeit unstable situation would be created.

As such, the St. Louis Fed sees no merit in banks creating their own cryptos. Removing the decentralized nature of cryptocurrency is the only viable course of action, yet it also removes most of the features which make this form of money so appealing. Centralized virtual money is electronic central bank money. This is not the same as a bank creating a cryptocurrency by any means, due to the centralized and monopolistic nature of this form of money.