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The Challenges of Designing a Fedcoin Economy – Jason Garland – Medium

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The Challenges of Designing a Fedcoin Economy

Crypto is booming, and those that are paying close attention understand the desire for a peer-to-peer digital money. Traditional banking is tedious, inefficient, expensive, slow, and provides few building blocks for innovation. Though many people have spoken to the monumental task of even partially regulating the cryptosphere and its growing userbase, not many have pondered the inherent difficulty of designing a digital money (Fedcoin) with built-in regulatory controls.

When designing the ideal digital money for a government dependent on tax revenue, there are two potential scenarios that come to mind regarding the high-level structure of the monetary system:

The first structure (very unlikely due to reliance on the fractional banking system) resembles a peer-peer (p2p) currency, like bitcoin in that users are in control of their wallets (or seemingly in control). By far the greatest issue with such a system is the risk to the fractional reserve banking system. Most fractional reserve governments would never contemplate giving up such a powerful (and destructive) tool. However, for the sake of exploration, let’s assume that a government with a full-reserve banking system launches Fedcoin. The Fedcoin network would be centralized and controlled by the government, likely with the following features:

Traceability & Transparency — In order to make sure that taxable money is not hidden away, and that people abide by monetary laws and regulations, the government would need access to transaction data. For example, Bob inherits one million Fedcoin, which is passed to him silently in the form of a password or private key. As the failure to disclose inherited income is against the law and a problem for a government that relies on said income, the government would want to make sure it can track money, at least above a certain amount. It would be highly inefficient for the government if the transaction amount was unknown, as the government would therefore be unable to efficiently allocate resources to collect the due taxes (and penalties!).

Identity — Wallet owners would have to register their wallets with banks or the government. Without regulated wallet ownership, users could spread payments and transfers over multiple accounts, effectively sliding under regulation limits. Let’s take Bob from the above example, who silently inherited one million dollars. Perhaps the grantor of the estate was smart and split the million into 101 different wallets to keep each wallet balance under a ten-thousand dollar regulation. Or perhaps Bob sent the inherited funds to a mixer wallet to avoid being taxed. Either way, it is clear that without registered wallet identities, the government would lose a great share of tax revenue.

Freeze & Seize — When taxes are not paid and when funds in certain accounts are held in suspicion, or deemed to have been acquired illegally, governments traditionally freeze accounts and/or seize the funds (and often the rest of one’s property). With a digital wallet controlled by a user, this is impossible without the wishes of the user. It is therefore preferable (for the government) to be able to freeze and seize funds (after due process of course…).

Inflationary — As cash is converted into Fedcoin, the intrinsic value (at this point just the cloth, energy, and printing machines) of the money is further debased and it becomes easier to “print” money. The inflationary feature of Fedcoin is rather obvious, as government economics is based on inflationary goals and policies.

The second structure (which is very likely) is a reform of the banking system that allows for faster payments, ease-of-access, greater efficiency in the banking sector, and simplified integration with payment systems. Banks, digital wallets, and payment processors would all still be regulated and licensed to ensure sound accounting. The government will retain the power to revoke licenses, investigate and freeze citizens’ accounts, and print money. This banking system 2.0 may be accomplished in several ways:

  • Decreasing barriers to entry for innovative fintech banks and startups
  • Reforming outdated banking laws and regulations
  • Restructuring clearinghouse processes
  • A real-time centralized interbank ledger monitored and validated by the federal reserve
  • Force banks to adapt to modern standards (i.e. transaction settlement time, 24-hour instant deposits, etc)

By only modernizing the current system, the government would retain the power that it has over the market, the currency, and the citizens that use it, without needing to impose identity controls that are glaringly obvious.

In addition to the heightened transparency of this new digital money (much more transaction data will be accessible by the government as fewer transactions are made in cash), the banking sector will experience heightened stability, and therefore control, as the fear of bank runs diminishes.

The perks of modernizing the current banking system while maintaining current controls and overall structure greatly outweigh the costs of issuing a Fedcoin. As this essay concludes, it will continue to be the private sector, not the government, that explores the potential of cryptocurrencies.

As the limits of what is possible using crypto continue to expand past the reach and control of the government, the government will likely attempt to outlaw the use of anonymous money, for it will threaten the power and size of the government.

“Regulation, regulation, regulation; the people must be protected!”

— The Government

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