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Some Thoughts on Fedcoin – a Fed backed cryptocurrency

Fedcoin and the Emerging Landscape of Central Bank Digital Currencies

Since the invention of Bitcoin, both economists and policymakers have given substantial thought to the idea of government- or central bank-issued digital currencies. The initial vision of a “Fedcoin”—a U.S. Federal Reserve-issued cryptocurrency—was discussed as early as 2014 and 2015, most prominently when David Andolfatto of the Federal Reserve Bank of St. Louis presented the concept at P2P Financial Systems 2015 and in a blog post. Around the same time, J.P. Koning’s commentary on Fedcoin further stimulated debate. While these were early explorations, the years since have seen numerous central banks—including the Federal Reserve—seriously consider Central Bank Digital Currencies (CBDCs), which share some conceptual similarities with the original idea of Fedcoin.

This article revisits the idea of Fedcoin in light of current developments. With many central banks now publishing studies, running pilot programs, and engaging with the public on the potential issuance of CBDCs, the original questions posed about issuance, monetary policy, miner rewards, and other technical matters remain highly relevant. Today, ongoing initiatives such as the Federal Reserve’s continued research on CBDCs and the BIS Innovation Hub’s work on wholesale and retail CBDCs have shed more light on these concepts, providing a richer context for understanding how a Fedcoin-like system might be designed and implemented.

Why Fedcoin?

In essence, a Fedcoin would function as digital cash—dollars in a native digital form, similar in some respects to cryptocurrencies like Bitcoin but stabilized to the U.S. dollar. Ideally, Fedcoin would offer:

  • Stability: Unlike Bitcoin, which can be volatile, Fedcoin would be directly pegged to the dollar.
  • Efficiency: Transactions could settle in seconds at very low fees.
  • Accessibility: Individuals and businesses could transact directly with digital dollars without traditional intermediaries.

In practice, this concept closely aligns with what is now broadly referred to as a retail CBDC, where the public can hold accounts or “wallets” directly at the central bank or have guaranteed convertibility at 1:1 with physical cash or reserves.

Issuance

One early proposal suggested that the Federal Reserve should “premine” all the Fedcoins it wishes to issue, placing them into a genesis block at the start. With a premine, the Fed could initially create a large supply of Fedcoins and sell them to the public at a fixed 1:1 rate with U.S. dollars. If demand surged, the Fed could continue selling from its premine stock, ensuring a stable peg. If interest waned, the Fed would simply hold the unsold portion, maintaining equilibrium. This approach would:

  • Ensure a Stable Supply: The central bank controls how many Fedcoins are in circulation.
  • Avoid Complex Issuance Adjustments: No need to dynamically adjust block rewards or create multiple parallel blockchains.
  • Maintain Confidence: A clear and transparent issuance model would bolster trust in the currency’s stability.

Notably, since 2015, central banks have increasingly recognized the value of retaining direct control over issuance. The Federal Reserve, for example, emphasizes careful design and policy considerations in its CBDC research and discussion papers.

Peg to the Dollar

For a Fedcoin to function as digital cash, it must be fully convertible to physical U.S. dollars at a 1:1 ratio. Maintaining this peg would likely rely on:

  • Conversion on Demand: The Fed would exchange Fedcoins for dollars at par value.
  • Reserves and Backing: Every Fedcoin in circulation would be backed by dollar reserves (or other suitable assets) held at the central bank.
  • No Arbitrage: Because you can always convert a Fedcoin to one dollar, there would be no rational reason for the token’s price to stray above that.

This approach reflects the current understanding that a CBDC must be as stable as the underlying sovereign currency. The Federal Reserve’s ongoing research consistently highlights the importance of maintaining financial stability and trust in the monetary system when designing a CBDC.

Miner (Validator) Rewards and Transaction Fees

In the early concept of Fedcoin, one complexity was how to reward miners. Bitcoin relies on block rewards paid in newly issued currency, but this can pose a governance and trust issue if applied to a government currency. If miners collude to change the rewards, they could undermine the currency’s integrity—although in a central bank environment, the currency’s value is guaranteed, reducing the disincentive to cheat.

A better solution might be to avoid miner block rewards altogether. Instead, consider a model where:

  • Transaction Fees: Validators (or “miners”) are paid through transaction fees, just as in many blockchain networks that have matured over the years.
  • Central Bank Support: If the network needs additional validator incentives, the central bank could help by making periodic transactions, ensuring baseline revenue for miners.

In modern CBDC proposals, the concept of “miners” often shifts to that of authorized validators or a permissioned blockchain, where the central bank and a set of regulated financial institutions run the nodes. In this scenario, transaction processing costs might be negligible, as these validators could be motivated by policy mandates rather than needing the same economic incentives as Bitcoin miners.

Openness vs. Restrictions

One of the most debated aspects of a CBDC is whether it should be a permissioned or permissionless system. Early Bitcoin advocates praised open systems for their ability to foster innovation without centralized gatekeepers.

  • Open Systems Encourage Innovation: Third-party developers can build “wallets,” analytics tools, payment apps, and more on top of open APIs, thereby increasing the utility and adoption of the digital currency.
  • Compliance and Security Considerations: On the other hand, the Federal Reserve or other authorities would need to ensure anti-money laundering (AML) and know-your-customer (KYC) compliance. While the system might be open at the transaction layer, user-facing applications may need to comply with regulatory frameworks.

At present, central banks exploring CBDCs often consider a tiered model, where the central bank issues the CBDC, and regulated private intermediaries handle customer-facing services and compliance. This hybrid approach aims to combine the best of both open innovation and regulatory safety nets.

Monetary Policy and CBDCs

When the concept of Fedcoin was first discussed, some questioned how introducing a digital currency would affect the central bank’s monetary policy. Today’s consensus is that a CBDC would be just another form of the central bank’s monetary liabilities—like cash or reserves—and wouldn’t necessarily change core policy levers.

  • Neutrality to Policy Operations: The existence of a CBDC, in and of itself, does not mandate a change in monetary policy. The Fed can still conduct open market operations, set interest rates, and influence credit conditions as it does now.
  • New Policy Tools: However, a CBDC could provide new avenues for policy implementation, such as paying interest directly on digital holdings, or even imposing negative interest rates more feasibly than with physical cash. This could become especially relevant in unconventional monetary policy scenarios.

Recent Federal Reserve publications, such as the “Money and Payments: The U.S. Dollar in the Age of Digital Transformation”, explore these possibilities, examining how a CBDC might support rather than disrupt current policy frameworks.

Should the Fed Be a Privileged User?

Some early commentators suggested giving the Fed special powers within the blockchain, such as the unilateral ability to create or destroy Fedcoins at will. Others proposed allowing the Fed to adjust block rewards dynamically. These ideas face significant challenges:

  • Centralization vs. Decentralization: If the Fed wields superuser privileges, the system becomes centralized. At that point, why even use blockchain technology instead of a traditional centralized database?
  • Credibility and Trust: A key benefit of distributed ledger technology is trust through transparency and the difficulty of unilateral changes. If one participant can rewrite the rules at will, users may lose confidence.

The current CBDC research environment generally supports clear legal and policy frameworks over technical “superuser” controls. Rather than hard-coding special powers, the Fed can maintain influence via monetary policies, legal mandates, and open communication, ensuring the system remains robust and trusted.

The Federal Reserve’s Ongoing Interest in Crypto and CBDCs

Since the original Fedcoin discussions, the Federal Reserve and other central banks have significantly expanded their research into digital currencies. The Fed’s FedNow Service launched in 2023, improving real-time payments and potentially laying groundwork for a future CBDC infrastructure. While FedNow is not a blockchain or a CBDC, its existence demonstrates the Fed’s commitment to modernizing payment rails—a stepping stone toward digital innovations.

Beyond the U.S., other central banks, such as the European Central Bank (with its Digital Euro project) and the People’s Bank of China (with its e-CNY), are actively experimenting with CBDCs. The Bank for International Settlements (BIS) has emerged as a hub for global coordination and research, conducting multiple CBDC pilots and publishing detailed reports on their design and implications.

References and Additional Reading

Additional Resources:

Conclusion

The initial concept of Fedcoin was a forward-thinking attempt to reconcile the innovative features of Bitcoin with the stability and trust of a central bank-issued currency. In the years since, the notion of a central bank digital currency has evolved far beyond its early outlines. With ongoing research, pilot programs, and public consultations, the Federal Reserve and other central banks worldwide have come closer to making digital versions of their currencies a reality.

While many design questions remain—concerning issuance models, monetary policy integration, technological underpinnings, and governance frameworks—continued exploration and dialogue will shape how CBDCs emerge. The core principle endures: a future digital dollar should combine the best attributes of traditional currency with the efficiency, programmability, and global accessibility of modern digital technologies. Fedcoin, in concept, remains a useful lens through which to understand these ongoing developments.

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