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Former top official says Fed should ‘Maybe’ create ‘FedCoin’ to rival Bitcoin (nytimes.com)
99 points by djacobs 8 months ago | hide | past | web | favorite | 106 comments

What is a "blockchain"?

To me, a blockchain is a way of solving double-spend problems in a Merkle tree maintained by open distributed consensus, by using some scheme to resist Sybil attacks. The scheme is not necessarily proof-of-work, but the fact that there's a double-spend problem and you're solving it is key to the idea.

If you don't have a double-spend problem because all your transactions commute (e.g., Certificate Transparency), you don't have a blockchain, just a Merkle tree. Which is great, you don't have to incur the costs of mining at all, nor do you need to think about mining incentives and structures.

If you're not using distributed consensus because you have a central coordinator, you don't have a blockchain either, and again, you get to not think about mining. Whichever transaction reaches the coordinator first wins, so double-apend becomes irrelevant.

If the Fed wants to build FedCoin, I don't see any reason why they should refuse to be the central coordinaor and instead outsource consensus to the internet. I don't see any reason why they would, if they want to influence monetary policy at all—70% of Bitcoin mining last year was in China, which meant that it would have been straightforward for China to (globally!) freeze a Bitcoin address, and a little more complicated but still possible to prioritize or throttle certain transactions.

Maybe being protocol-compatible with Bitcoin or ERC20 or something would help, but fundamentally this would be an API to transfer USD, not a decentralized system.

See also patio11's Tweet https://twitter.com/patio11/status/583698553614143488 "Most advantages of Bitcoin which matter are captured by, and improved upon by, a LAMP app which simply holds account balances." If the Fed wants to build that app, great!

There is already a word for what you are talking about, and you used it:


So I counter your argument. It is useless to call "Blockchain" something that must necessarily have consensus. Or else we should just call it a consensus mechanism, not a blockchain. So instead, I propose the following:

A blockchain, is a cryptographically signed linked list.

Note, things like "a distributed ledger" aren't included in that definition. Why? Because a distributed ledger is only possible if writes are cryptographically signed. Else, it is too easy to fake, sybil, forge, exploit, manipulate, lie, or mutate the ledger in a public setting.

I've done a lot of work on commutative transformations (CRDTs, at https://github.com/amark/gun ), and while they are a very different (and more scalable) approach to arriving at consensus (through deterministic means), I still think it is appropriate to call such CRDT/DAG/Merkle/other cryptographically based systems a blockchain. Why? Simply because they can be used as a distributed ledger, and that is the point that most people actually talk about/intend.

At the end of the day, what people intend when they talk about "blockchain" isn't even cryptography or technology, it is simply an economic model. An economic model that doesn't require institutional trust.

So in that sense, would a FedCoin pass as being a "blockchain"? From a technology standpoint, sure, but not from an economic perspective.

Would love to hear your counter-thoughts!

> A blockchain, is a cryptographically signed linked list.

I've always assumed this definition by analogy with Cipher Block Chaining (https://en.wikipedia.org/wiki/Block_cipher_mode_of_operation...), but of course where a word starts out and where it ends up can be two very different things.

> Ehrsam, Meyer, Smith and Tuchman invented the Cipher Block Chaining (CBC) mode of operation in 1976

Seriously, even the term was coined back then and the concept is actually pretty identical if you think about it.

What about a cryptographically signed linked list that can't be used as a distributed ledger?

Because if those are blockchains too, then my country had dozens of developers writing blockchains before Bitcoin ever appeared, since we had to implement https://en.wikipedia.org/wiki/SAF-T

... like your classification. My version of that is in short:

Blockchain is a technical protocol ( crypto signed list over a P2P network with consensus). DLT is a higher level function on top of a blockchain which adds social / legal / economic status to the data in a blockchain.

"Consensus" was a word used in the distributed systems literature for all sorts of problems well before the Bitcoin paper. (As was "Sybil-attack-resistant", which is another phrase I ~used that was also in common use.) Bitcoin is interesting because it allows reasonably trustworthy consensus in a Sybil-attack-resistant way for a particular problem, namely, a distributed ledger that permits anyone to participate without permission from a central authority. There were lots of other systems for distributed consensus for other problems: a random example is BitTorrent.

I would actually dispute the definition of "cryptographically signed linked list" for Bitcoin. What makes Bitcoin blocks valid is not that they're cryptographically signed (signatures are over transactions, from the address that is trying to send money, but you can sign two different transactions and now you have double-spend). What makes them valid is the inclusion of a solution to the mining problem that incorporates the data being sent, and I think that in any context other than Bitcoin, "a message that includes a random nonce such that the hash has certain properties" wouldn't be called a "signature" at all. Take Hashcash, the proof-of-work system for email anti-spam that somewhat inspired Bitcoin: the web page and paper calls the authentication token a "stamp", and doesn't use the word "signature". The FAQ suggests an extension for mailing lists using the phrase, "A hashcash specific approach (avoiding signatures)".

I am super excited about CRDTs but they seem like an entirely unrelated problem space to Bitcoin, so using the term "blockchain" doesn't make sense to me. (In the same way that I am excited about DVCSes like git using Merkle trees to allow mergeable offline work without a central coordinator, but git is definitely not a blockchain.) That said, I did say this on an IRC channel the other day:

    < geofft> I would define "blockchain" as "a Merkle tree that solves the double-spend problem in a way that's resistant to Sybil attacks"
    < geofft> if your transactions commute, you don't have a double-spend problem, and therefore "blockchain" isn't meaningful
    < ...> geofft: doesn't stop people hawking blockchain solutions though :P
    < geofft> oh, sure
    < geofft> I would also define "blockchain" as "the word you should use instead of Merkle tree on your investor pitch"
So if that's your reason for using the word "blockchain," good for you :-)

I am reading through your Distributed Matters slides - exciting stuff and the point about ATMs not being strongly consistent is a very good one. Will need to reread a few times to make sure I get it!

You bring up so really good and fair points, specifically around the double-spend problem.

BitTorrent doesn't need to solve the double-spend problem. Yes, it wasn't the cryptographic signatures that solved that in Bitcoin, BUT at the same time, they could have used PAXOS/RAFT to "elect" a random leader to prevent double-spend AND you'd still have consensus.

But it isn't the "consensus" alone, as you note, that makes Bitcoin special - but this is exactly my point in the previous post about why "blockchain" should mean something other than just consensus. It was the ability, as you say, to get consensus without using leader-election algorithms (that would ultimately depend upon trusting that random leader).

Now, if you suggest, instead, that "blockchain" should mean specifically that, a trustless non-leader double-spend solution, I think I can buy that. However, immediately PoS and similar algorithms have to be thrown out as not blockchains then (which hey, I'm okay with that).

This is exactly where, according to what I think you are saying, then things like CRDTs/DAGs could still match your definition, despite being commutative. Sybil-attacks become irrelevant (because the CRDT/DAG approach only cares about the validity of signatures, not who is trading/mining/elected the most, which might be vulnerable to Sybil-attacks), because if a 1000 extra peers/bots commute the same operation, it doesn't change its significance compared to a single peer that commutes the operation.

So wouldn't that match even your own "blockchain" definition?

Oh, I'm glad you found that explainer! I'm glad you enjoyed it :).

This really misses the picture of what's going on. Fedcoin could be coordinated by the federal but live on or be connected to a public smart contract platform where that, now digitised asset, could be used programmatically and interdependently with many other systems in a much more efficient and easy to assemble way than can now be done. This may not sound like a good idea to most on hn but it's at least new.

Smart contracts are cool, but I don't think smart contracts and blockchain are the same technology. (Indeed, Bitcoin does not meaningfully support smart contracts, so we should use different words because they're different concepts.)

It's certainly possible to implement centralized, non-proof-of-work smart contracts: publicly send the Fed's API a Lua script. Whenever the Fed changes their ledger, they run your Lua script in a sandbox with limited CPU, see if it outputs any transactions, and processes them. Anyone can run the Lua script themselves and see if the Fed was trustworthy - but if the Fed chooses not to run your script, well, that's just a centralized bank doing its centralized thing, tough luck.

If you want to not put your reliance on a centralized bank to run your script, then you've got to use a distributed consensus platform. Even if you had something Ethereum-like that the Fed simply oversaw, they could just refuse blocks they don't like (and in fact they'd essentially have to to have any meaningful control of the currency at all), so all the complexity of gas and proof-of-work isn't buying you anything.

Relatedly, and along the lines of what 'patio11 was saying: you can implement smart contracts for a centralized currency today. A startup that had its own API for opening accounts, sending it USD, and running publicly-visible Lua scripts would be a straightforward thing to build, and if that startup ran for enough time, you'd gain (centralized) trust in it doing its thing.

Again, there are perfectly fine and very useful blockchains that do not provide any kind of trustlessness. See corda.net. This insistence that a blockchain cannot be permissioned is not accepted by most people. It's silly to keep insisting a word means some restrictive value of X when a great many people do not use it as such. A FedCoin could be highly centralized and still provide enormous value as a trustworthy, distributed database.

The Fed can create unlimited money out of nowhere and doesn't have to answer questions about it from anybody. I don't think they dream is a transparent blockchain and money supply limited by an algorithm.

They don't want to be seen as "not having to answer to anyone" , so they would be going the blockchain rule, i.e. semi-accountability , i.e. stealing some of bitcoin's "decentralized" fame.

The whole point of having a national currency is that the money administrators answer to Congress, not the businesses who borrow and lend money. "Decentralization" means taking power away from Congress and giving it to Goldman Sachs and the other big banks.

The Fed is a private entity which is owned by its "Member Banks" (ie. big banks).


Moreover, the currency that the Fed issues is not technically a "national currency", its "Federal Reserve Notes", that is a debt instrument which is theoretically backed by "US Dollars". Where are these US Dollars?..and more importantly how do we get some?

It is not "owned" except in a weird metaphorical sense, and moreover, big banks are obligated to own an exact amount of shares - no more and no less, and they may not sell them - by act of Congress. If you scroll a little bit up from your link: "the 'ownership" of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank 'profits.'"

A "US Dollar" is a unit of measurement; a "Federal Reserve Note" is a physical object. You can no more own a US dollar than you can own an acre or a joule, but you can certainly own land or a battery. Casting doubt on the US dollar because you can't touch it makes as much sense as casting doubt on meters or Bitcoins or Goldman Sachs because you can't touch them either. They're all social constructs, but social constructs are quite real for anyone participating in the society that constructed them.

> create unlimited money out of nowhere and doesn't have to answer questions about it from anybody

So, Tether?

Would it have an incentivized structure?

It could be reasonable to somehow have control over things like the difficulty of mining or to be able to spawn new currency at a reduced cost via some sort of master certificate while still allowing transfer without communicating with a central coordinator system. A distributed system is a lot less likely to go down or become completely compromised.

The properties of "unlikely to go down" don't require a trustless blockchain; the attributes of being resistant to a node being compromised don't require trust beyond consensus. git is unlikely to go down and verifiable. Copies of a git repo verified by gpg signatures and repos that only accept commits that pass verification requires only as much distribution as running three instances. The fed can do all of this without giving up any control.

There is a tremendous difference between "we have three servers so our stuff probably won't go down" and "the system could theoretically remain in use forever even if we disappeared from the world".

And that difference is gigawatts of power. A system that's "only" as reliable as Fedwire or SWIFT but uses 99% less power than cryptocurrency is an interesting tradeoff.

> which meant that it would have been straightforward for China to (globally!) freeze a Bitcoin address

No. It's not like all the Chinese miners are controlled by the government. It's not some monolithic agency.

And then, there are many other coins.

All Chinese miners are subject to the government's laws. They don't have to be directly day-to-day controlled by the government for the government to say, "We are applying sanctions to this entity, nobody may participate in helping them move money. Mining a block that involves a transaction from this Bitcoin address counts as helping them move money. Mining on top of any new blocks that involves transactions from this Bitcoin address, and therefore causing consensus to accept that block as part of the longest chain, also counts as helping them move money."

This isn't a China-specific argument: I'd expect that any functioning government could the same. The only difference is that governments without a working national firewall would probably be less willing to spend resources on chasing down miners who connect to Bitcoin peers via VPNs in other countries. It just happens to be true in this case that the Chinese government has a national firewall that they use to shut down VPNs, the Chinese government's international interests are often opposed to the US Fed's, and 70% of Bitcoin mining happened in China's jurisdiction last year.

It's a safe assumption that everything is under government control in China. If not today, maybe tomorrow.

> What is a "blockchain"?

I am always curious, blockchain was not defined in Nakamoto's work. So, where did the word actually originate from? And what did it meant for the word's inventor.

> blockchain was not defined in Nakamoto's work

However the whitepaper does use the phrase "chain of blocks". https://bitcoin.org/bitcoin.pdf, page 7.

So probably the word "blockchain" came about because someone read or heard someone else say "chain of blocks" in the paper and they said "oh, so a blockchain", and thus the word was born.

Wikipedia cites what looks like a mirror of Nakamoto's original Bitcoin source, which uses "block chain" in the comments of main.h: https://github.com/trottier/original-bitcoin/blob/master/src...

I would say this is a rather limited, technical understanding of a blockchain. The three most interesting aspects of a blockchain are (1) the state of blockchain is visible to all participants (2) the rules (the code) for changing the state is visible to all participants and (3) there is some mechanism to detect and punish rule breakers and aggressors who try to deform the state. Look at it this way and indeed a blockchain is really a very sophisticated collaboration model.

You don't need the distributed consensus or the decentralization or the trustlessness. There are blockchains with central coordinators and without trustlessness that may still prove very useful especially in global finance. People think Bitcoin or Ethereum are complicated but really, they are nothing compared to the global financial system. Distributed blockchain databases are much more elegant than what we have today in terms of achieving consensus on a very large (global) scale.

FedCoin is a crazy idea but it's not stupid. A national public ledger would open a lot of very interesting doors. (Though the republic would likely collapse, see my other comment.) Even if the Fed required only trusted nodes (ie bank-like entities) it still would provide everything from a true national ID system to real, binding peer-2-peer lending between citizens to a system where everybody has perfect, real-time visibility into the national economy (unlike the primitive system we have today where the Fed collects a bunch a data, massages it, and then announces it each month.) Lots of other problems -- everything from medical records to real-estate -- become a lot more tractable.

What? There is no mechanism to "detect and punish rule-breakers" in either Ethereum or Bitcoin. Bitcoin's only mechanism is to push global human-readable alerts, or to pressure rule-breakers to stop through a blog post, as in the case of SPV mining: https://bitcoin.org/en/alert/2015-07-04-spv-mining.

If you define "rule-breaker" as "generates invalid blocks", then the only punishment rule-breakers receive is that... their block is invalid, they're ignored, and they get to try again next time.

I don't see any sophisticated collaboration model in play here.

> Even if the Fed required only trusted nodes... Lots of other problems -- everything from medical records to real-estate -- become a lot more tractable.

Why aren't they solved by a database and a public API? What does the blockchain add?

Blockchain coordinates databases over different legal entities. That's the magic. It's still your DB in your Datacenter when you run your own node. You have autonomy over your own records with your keys. And you have visibility of all other records. A big central DB is under the control of a central body. With a blockchain the central control is / could be limited.

Definitely, but this is a feature that a centralized authority like the fed would prefer to do without. Whatever technology is behind any sort of "FedCoin" would certainly not be blockchain. They will not relinquish control of their currency, doing so would make themselves obsolete.

(1), (2), and (3) are true of Certificate Transparency.

(1), (2), and (3) are true of a system where a single trusted coordinator gets to order (and perhaps reject) transactions. A slightly less anonymous version of any electronic stock exchange would count.

(1), (2), and (3) are true of the Debian apt repository.

(1), (2), and (3) are true of any game without secret information, like chess or Go or Pretty Pretty Princess.

You could call all of these "blockchains," but I think that makes the term so generic as to be useless. If you want a national public ledger, that sounds interesting, but please call it a national public ledger, not a blockchain.

The basic premise of this headline represents a complete failure to grasp the point of a cryptocurrency, which is to take the power of money issuance away from incumbent authorities who can back it with physical force (that is, states), and devolve it into a first order power available to any social group. The paradoxical claim that a centralized bank could ever issue currency based on the presumption of decentralized support is epitome of misapprehension, or at least misappropriation of jargon.

The Fed already has "FedCoin" for all intents and purposes, and does not need the cooperative casino incentive system known as a blockchain in order to compel rules-compliant participation from its users.

We tried the "anyone can issue money" model in the 1800s, all it led to was bank runs and scams. The current system exists for a reason.

If the blockchain crowd wants to relearn those lessons, they are welcome to, as long as they keep their shenanigans out of the real economy and away from people who don't want anything to do with the experiment.

Well, ultimately a decentralized blockchain tackles the issue in a much different way. In the 1800s, if you were a money issuer, you could print any amount you wanted. In a truly decentralized blockchain, there are defined rules for how new currency enters the system. You cannot just print new money. The amount that exists is fully visible by anyone.

Transparency is everything. This also explains why a currency like XRP is not a real blockchain. Beware these pseudo-blockchain projects, because they are much more similar to your example from the 1800s.

As the proliferation of newly created digital currencies should tell you, printing new bills at will has been replaced by creating new currencies at will. So a series of new bills in the old system is now equivalent to a new blockchain. While we have thus the well perpetuated illusion of an ever fixed amount of currency, the system moves towards massive inflation due to an incentive to create new currencies.

The incentive to create new currencies has really only taken major effect over the past year. Up until then, the term "ICO" hardly even existed. Since that time we've seen a goldrush to launch separate blockchains and sell ICO's.

But that's just a natural by-product of crypto currency's evolution. The amounts being raised in ICO's has been steadily decreasing. In summer 2017, you could raise $100M on a half decent project. Today, you're lucky to raise $10M. Investors are also demanding more transparency and deliverables from the projects.

This trend will continue as the market matures. Fundraising will continuously become more difficult once investors get burned a few times. This is all very new, people have no idea what they're doing. Eventually the fools will go broke and the smart money will remain.

The reality is that with so many scams / useless projects being launched every day, investors need to do more and more research to get positive ROI.

It remains to be seen how that will work out. If your equivalency were correct, we'd expect the issuance of new currencies to reduce the value of old ones, and so far we're not seeing much evidence of that.

Hayek wrote a book arguing that a system of competing privately-issued currencies would ultimately result in currencies with stable value. Of course we haven't yet seen evidence for that either.

> If your equivalency were correct, we'd expect the issuance of new currencies to reduce the value of old ones, and so far we're not seeing much evidence of that.

I'm not sure what evidence we should even be looking for here, but certainly the share of Bitcoin in the cryptocurrency markets has dropped alongside its value[1]. Anecdotally, most people I've talked to holding, say, ETH, would be holding more BTC otherwise, so it's hard to argue that the competition doesn't depress the price.

As for the Hayek reference, I have some thoughts on that: https://paulbutler.org/archives/stop-dragging-hayek-into-bit...

1: https://coinmarketcap.com/charts/#dominance-percentage


> We tried the "anyone can issue money" model in the 1800s, all it led to was bank runs and scams.

And now it's back with technology behind it. A lot of people call ICOs scams. What's the equivalent bank run? Perhaps a panic flee from fiat reserves?

The equivalent is exit scams and flash crashes; a lot of people keep pointing out that Tether is a non backed token pretending to be a backed one.

> What's the equivalent bank run?

Bitconnect is sure to be one of the first of many examples. https://en.wikipedia.org/wiki/Bitconnect

I'm more curious how the sporadic economy and capital flight will hit our existing centralized structures. They haven't been load tested against hyper-liquidity of cryptocurrency with mass adoption.

... while minimizing the wasteful environmental impact of blockchains due to the power requirements of each transaction.

This is probably the one "feature" of blockchains that will kill it, since they're based on proof-of-lots=of-work, and work needs power.

Blockchain as it exists today is a proof of concept. It shows that people can use code to create a monetary system. The system does not need to be backed by any government or physical good guaranteeing its value.

This proof of concept can now manifest itself in a variety of formats. Many of which we cannot fathom today, because they haven't yet been invented. There are many intelligent people now working on this problem and improving the way a blockchain works, or even pulling from that proof of concept and rethinking the solution without traditional blockchain.

People are too heavily focused on what the technology is capable of right now. That is irrelevant. The industry is in its infancy. Up until 5 years ago, the only blockchains that still exist today in any meaningful format are Bitcoin and Litecoin. Litecoin is just a Bitcoin clone.

Just wait and see how this space will develop over the next 10, 20, 30 years. The proof of concept is that people will assign value to digital assets without any authority backing them. That's the most important development.

Yah and that proof-of-concept shows that you need insane amounts of power per transaction, killing the idea completely and making it unusable.

> There are many intelligent people now working on this problem and improving the way a blockchain works, or even pulling from that proof of concept and rethinking the solution without traditional blockchain.

In other words, no blockchain is better than blockchain.

> Yah and that proof-of-concept shows that you need insane amounts of power per transaction, killing the idea completely and making it unusable.

Why? There are many Proof of Stake coins out there too, for instance Dash and NEO (and many more coming).

I mean let me put it this way, how can you even claim that a blockchain requires more energy than a Visa transaction? Isn't the price of a transaction an indicator of the amount of energy needed for it, for ordinal comparison?

For instance, if Visa charges $0.3 per transaction, and another network (Whether it's cryptocurrencies or Gnomes carrying gold from you to the other person) charges $0.2 per tx, then as long as the two compete freely, you can say that the energy required by the latter is lower than the energy required by the former.

Keep in mind, I said 'compete' and 'freely'. Visa may have a higher profit margin because the alternate payment system isn't popular enough yet, so Visa's power expenditure could be much lower than reflected by their tx fee.

No cryptocurrency is a monetary system, they aren't even a functioning currency. For that to happen they would need to fulfill three functions that currently none do. Namely:

A means of exchange A unit of account A store of value

They satisfy the first but not the other two. I cannot know for sure what value my coins have on any given day, let alone what they are likely to be valued at by next year. Thus they do not act as a store of value nor a unit of account.

If it takes the electricity consumption of Denmark to secure less than $10bn in transactions, how much will it take to replace the $6tn daily Forex volumes?

Honestly I wish people would realise how utterly pointless crypto is as a currency. Maybe then I'll get a cheap graphics card.

Definitely one issue with crypto-currencies today is that they have volatile pricing which makes them difficult to use in commerce. There are several projects working to use smart contracts in order to peg the value of the coin to currencies like USD, EUR, etc. As liquidity increases in decentralized exchange formats, such as atomic swaps and DEX applications, there will be enough volume to properly manage these smart contracts to peg coins to fiat currencies.

A unit of account from my understanding simply means that other people are willing to price their goods/services in your currency. This is a by-product of people participating and using the token, and it being stable enough. So once there is a "stablecoin" that gains traction, this will surely follow.

I've enjoyed your posts in this thread but I have a question. How are the projects you allude to fundamentally different than PayPal, iPay, GooglePay, Venmo or just strait up Visa or MC?

Crypto-currency is different in the sense that it is decentralized. Paypal and other payment systems can and do freeze people's balances at will. Many countries have features disabled. Some countries are flat out discluded.

At the end of the day, there is no button that can be pressed to remove your access to the system.

MakerDAO is a great example of a decentralized stablecoin on the Ethereum network. I personally own some DAI tokens that are pegged to the dollar.

The problem is a catch 22, you cannot be stable until you gain volume and you cannot gain volume until you are stable.

Simply using a smart contract between two parties doesn't give the underlying coin stability, and it introduces the risk that one party ends up with an undervalued/overvalued coin. The average person will still earn in dollars, shop in dollars, pay tax in dollars and do accounts in dollars. The demand for crypto as a result will be restricted to speculators, criminals and (some) geeks. I cannot see stability anywhere on the horizon.

Their value is so volatile because their total valuation is not big enough to make them stable. Multiply Bitcoin's or Ethereum's total valuation by 100 and suddenly you have a much more stable asset at the price range of gold. And being stable makes them way more valuable so their price would keep increasing just because of that.

To solve proof-of-work consuming too much electricity, Ethereum is upgrading to proof-of-stake which is on the roadmap and consumes a negligible amount of power.

Their value is so volatile because they have no intrinsic value, no government (that I am aware of) is demanding tax paid in a cryptocoin. There is also no mechanism for increasing the value of the coin, through a central bank interest rate. There's also no means to increase the supply (after mining runs out) to allow for economic expansion, eventually you will end up with run away inflation, with no mechanism to control it. Honestly they don't work as currencies, they are speculative assets underpinned by some interesting but largely redundant technology.

Proof of stake is built on trust, much like the financial system, so why reinvent the wheel for a corruptible ledger of a non-trustless, non-currency?

Bitcoin is also backed by the same physical force of the state.

Otherwise armed groups would seize the miners or break into the exchanges and use physical force to steal the bitcoin.

Another clickbait piece. Reading through the byline:

If cryptocurrency and blockchain technology really are the future of money, the world’s central banks need to get involved, a former Fed governor argues.

Isn't that a big "if"? And in that case, the real headline should be - "If Cyrptocurrency is the future Feds should build a Fedcoin says a former Fed Governor".

And I think people who talk about how banks/Visa might be affected by cyrpotcurrency should take some time to read this:


HN link:


There's an interesting paper[0] from the Bank of England that considers the challenges and opportunities central bank issued cryptocurrencies might entail.

0. https://www.bankofengland.co.uk/working-paper/2016/the-macro...

Not sure why NYT is taking some "former governor's" opinion on this. Let's take a look at what the Fed itself (themselves?) think. Quite recently (2018-04-16): "The Case for Central Bank Electronic Money and the Non-case for Central Bank Cryptocurrencies" at https://research.stlouisfed.org/publications/review/2018/02/...

In a nutshell, the St. Louis Fed thinks there's no good case for central banks to get involved in creating cryptocurrencies (though there is a case for fiat electronic money). ISTR that the Swiss National Bank expressed pretty-much the same opinion, too, not more than a few weeks ago.

It's worth noting that most central banks already do have electronic money (called 'central bank reserves'), which commercial banks use for settling inter-bank payments between each other, as well as transfers to and from the Government (Government spending into private bank accounts, tax transfers to the Government from private bank accounts, and the purchasing of Government bonds and securities).

What the linked paper is talking about (it's also part of the Swiss proposal) is to provide accounts for private individuals (not just banks and large financial institutions) to access this kind of money. The advantage is zero risk of losing your money (unlike commercial banks it wouldn't require the Government having to bail anyone out or insure anything), but the downside is reserves don't attract any interest.

How about fedDigitalCash? It's crazy that I pay a few percent of every transaction to visa for no reason every time I buy anything in 2018

Yes, paying a few % on every transaction to move kilobytes of information over a network is absurd. The true cost is less than pennies but the EMV cartel led by VISA has successfully kept the price many orders of magnitude higher, employing anti-competitive tricks like: hiding the cost to consumers by contracually preventing retailers from increasing prices for VISA payments.

Free/cheap digital payments exist (eg. EU SEPA credit transfers); for credit cars, however, the majority part of the cost (and thus price) is not just making the payment but ensuring that payments are reversible in case of fraud and other disputes, and that customers can get their money back even if the money can't be recovered from a fraudster.

If you'd add a reputable escrow service, dispute resolution system and fraud insurance on top of any cryptocurrency, these features will drive the cost up just as high or more.

You are underestimating the cost of maintaining such a network and underwriting the risk of fraud. Before anyone chimes in here with a neckbeard and a “but [libertarian blockchain drivel]” I do not think the effective monopoly that visa has on transactions is a good thing nor do I think it’s the best system.

The funny part is that EC (a German-only card network that stands for the E in EMV, with MasterCard and VISA being the M and V) has less than 0.125% fees for the smaller retailers, and even less for larger ones – you basically only pay the interchange fees.

This is why e.g. ALDI for many years only took EC, but not MasterCard or VISA.

I don't think it's perfect by any means, but it's quite a bit more than simply moving kilobytes around.

For no reason? You pay visa (or more correctly, the merchant pays) to run a network so you can use your card anywhere, to put time and energy into integrating with merchants and to provide a layer of fraud protection.

Via increased product prices, I assume you mean?

"It would be quite a twist if a technology whose most ardent fans are motivated by distrust of central banks became a key tool for those banks."

It's the other way around: the fact that publicly provable and verifiable financial systems are possible, yet the central banks didn't work this out (what they should have been striving for from the start), nor improve on it for another decade now is what fuels distrust of the old blindly trusted financial systems.

Pretty much nails this on the head. The FED failed at its mission and is due for disruption. Considering how poorly our democratic system is working, it's too going to come from private or open source industry.

The money part of the technology is not important for central banks. Underlying technology allows more useful solutions than cryptocurrency.

What Fed and others in banking want is new forms of distributed accounting and settlement processes. You can apply the cryptographic technology for verifying and connecting database rows across institutions in a way that is both transparent, private and secure. If there is a public ledger online, it can be audited by anyone.

Isn't that what a line of credit is? Or a debit card? It's got a history of spending, it's very hard to double spend, and its completely traceable?

Sometimes I think fed has learned from Bitcoin that they don't trust us with Bitcoin, and they shouldn't trust us with cash either. I don't feel like they really give a shit about what a distributed ledger actually accomplishes and how it protects users.

Additionally, mining. Mining is a huge problem in my eyes because it wastes a ridiculous amount of energy to not produce anything. I'd love to just buy-in with my credit card or with cash, and have those coins generated (until supply is depleted) to meet the value at that time. If fedcoin worked like that, that'd be neat. Otherwise, it's just an energy sink, and I think we should start being more conscious at where all this energy is going.

Side question, HNers who use Bitcoin, why are you using bitcoin? Why aren't you using monero? If it's just convention, then switch! That's how conventions change!

It could create FedCoin. But, instead it will allow the investment banks to make it for them and then sign off on whatever they makeup because they can not only make it legal but make it easy to use.

Then the government would just let those coins that pass through this with open arms. Regulation now is the biggest part of an ICO and if you are an investment bank and want a big piece of the distributed ledger pie you probably are already figuring out how to do this.

I was at a meeting with laywers who wanted to understand what an ICO is. KYC and AML laws are now the big problems on implementing an ICO. 2017 was the start of the ICO boom and 2018 will be the start of the enforcement. Expect a bunch of coins to disappear.

> 2018 will be the start of the enforcement

For what it's worth, I've been hearing "X will be the year of regulatory enforcement" since 2014. So far all we've seen is a very level-headed and even-handed approach targeting just the outright scams. "year of regulatory enforcement" in the crypto currency space is becoming a bit like the "year of linux on the desktop" meme.

Yes, the SEC will continue to take a very light touch. There's no upside to them cracking down on ICOs. The only people losing money are the people who mostly understand the risks of cryptocurrencies and "invest" anyways. The SEC may get serious when grandmothers lose money or there's blood in the streets. Until then there's a kind of regulatory sovereignty that must be defended on a pro forma basis eg the slam-dunk enforcement actions and various announcements that "some ICOs are securities but we won't say which, never the less it's our decision to make and nobody else's." The only real risk to the SEC is that some other regulator like the NFA or the CFTC will step in and say "these coins are currencies and we're gonna regulate them" or "these coins are commodities and we're gonna regulate them."

> There's no upside to them cracking down on ICOs

To add: enforcement resources are limited. Every cryptocurrency fraud investigated is a bread and butter fraud ignored. While caveat emptor isn't the law of the land, justice is a slow-turning mechanism. What will be enforced in the long term need not be addressed in the short.

Except IRS has guidance on ICOs and it has become a real big problem that bullshit ICOs are out there. If large investment banks are interested in the space then regulation will eventually come forth.

Remember that Coinbase was asked to reveal people who made trades over $10,000.

I was at a conference with someone who gave a speech saying that ~80% of all ICOs are fraudulent. I think that is a bit low in my opinion.

I think the actual facts you gave regarding enforcement support my point, don't they? All we've seen so far is very targeted, specific actions against the most egregious offenders, whether it is outright scams and ponzi schemes or a financial institution handling billions of dollars worth of transactions while trying to avoid reporting anything.

Basically if you're running a ponzi scheme, an investor con, an unlicensed custodial bank, a non-conforming public securities offering, or a money-laundering operation, expect some agency of the Feds to come calling. But, uh.. duh? That has nothing to do with whether you are handling crypto currency or not.

So far we haven't seen action against legitimately innovative, non-scammy operations in this space. Just the offenders that are quite clearly and quite brazenly flipping their middle finger to the regulations.

Up to this point yes . Sorry I think I read your post too fast . Right now at this time you are right . I think I may be changing my concept of what will eventually happen. I thought it was a sure thing but now it’s something completely different .

Yeah, I was myself quite shocked at the (lack of) enforcement against some of the wild west ICOs in the ethereum space, and the ethereum founders & foundation especially. Even rather annoyed -- I've for years been saying they'll go to jail, and turning down very lucrative opportunities by people in that space that would have made me very wealthy today, because I thought they were certain to see massive fines and possible jail time. But they actually got a grandfathered exception and not even a slap on the wrist. Doesn't exactly motivate me to conservatively follow the rules in the future :(

> Expect a bunch of coins to disappear.

If the Feds can make it disappear, it was worthless anyway.

HN previously discussed a Bank of International Settlement Report on Central Bank Cryptocutrencies - https://news.ycombinator.com/item?id=15278063

> But what if central banks themselves entered the game? What would happen if the Federal Reserve, or the European Central Bank or the Bank of Japan used blockchain technology to create their own virtual currencies? Besides, that is, having some cryptocurrency fans’ heads explode?

Maybe some of the wacko nut-jobs out there in cryptocurrency fandom. But most would welcome this with open arms. It would mean that you could create smart contracts denominated in fiat, or trustless exchanges, or trustless covered shorts on the price of bitcoin, etc. What's the downside?

I'm probably one of those "wacko nut-jobs out there" that you refer to, so you may just want to dismiss my point outright with ad hominem. However, I don't think any of us wacko nut-jobs would care about fed coin, as long as they don't go after competing coins. In fact, I welcome the competition. As long as it's free competition, may the better, less manipulable, coin(s) win.

Why competition? This isn’t a zero sum game.

It is. You either store value in dollars, euros, gold, real estate, art or bitcoin.

You can't "dobule spend" the same value.

The market cap of bitcoin going up does not make the market cap of gold, usd, or real estate go down. Total aggregate wealth is not zero/fixed sum.

Pretty sure the USD is enough.

You can't transfer USD electronically without using banks or third-party services that are trying to skim basis points off the entire economy. In theory a well-implemented FedCoin could be more neutral and efficient.

That's not a limitation of USD. If the Fed wanted to create an API that let you do that and sidestep banks, they could. (And if they couldn't because a government agency can't casually destroy an industry like that, that restriction applies to FedCoin, too.)

Indeed, and I think an implementation of "FedCoin" would probably be better off without a blockchain, given that you're trusting the government anyway.

There's no reason at all the government couldn't give every citizen a bank account and let them wire funds to each other. In fact this used to be exactly the case: any citizen could walk into the Post Office and open a savings account [1]. Like most services that didn't benefit the rich and actually benefited the poor it got shutdown once the neoliberals took over in the 70s. Nowadays 7-10 percent of the population is unbanked and forced to rely on criminal pay day lenders, check cashers or hiding money in their cars.

FedCoin would have one benefit though over a traditional banking system and that is surveillance. It'd be very interesting to have a public, error-free record of eactly how much money each citizen is receiving or has. If it ever did happen and people could see in perfect black and white just how ridiculously unequal the country is I don't think the republic would survive much longer after that.

Which is why this article is kinda hilarious. Even the central bankers, supposedly the smartest men on the planet, don't grasp that this is the whole reason private banks exist: to obfuscate cash and risk flows. Like that's the point [3]. We wouldn't have an economy if private banks couldn't do their thing. An economy based on any kind of public ledger without private banking (and private ledgers) would be radically different.

[1] https://en.wikipedia.org/wiki/United_States_Postal_Savings_S...

[2] https://www.americanprogress.org/issues/economy/reports/2014...

[3] https://www.interfluidity.com/v2/2669.html

It would be the USD; that's the point.

"we don't see any immediate systemic risk issues" - Warsh, 11 July 2007


Please be specific; the link between the financial crisis and a hypothetical FedCoin is not at all obvious.

The connection is that this is the same person making both predictions.

Not OP, but I think the point being made is that his prior judgement on financial matters doesn't exactly inspire confidence.

That said, I have some sympathy for any policy maker giving public statements in an overheated economy: the seeds of the crisis have already been laid and the statements one makes may actually precipitate the crisis rather than avoid it...

Looks quite close to the way the Basis people (http://www.basis.io/) talk about a central-bank-run version of their currency, where the bank can target a level of inflation and let the system do the rest.

China already has WeChat money. It's literally everywhere. To the point where, you often spend days without touching money. People now sigh and groan and ask for the manager to get the key to open the till if you insist on paying with cash.

They want to do away with unaccountable physical cash. Another method of tracking and control. They will keep their gold of course.

Answer: No thanks.

If I can't buy, let's say... heroine completely anonymously with FedCoin then I think the whole spirit of the initial vision has been violated. Call me crazy but I don't think this is what's envisioned by those that would advocate for something like FedCoin.

It’s not “should”.

More like “when”

They should create it just to show that it will be a failure.

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