Fed-backed digital currency is inevitable

It’s been a wild year for cryptocurrencies.

From bitcoin’s skyrocketing valuations to the harsh, high-profile dismissals of the cryptocurrency to the introduction of bitcoin futures to heightened demands for federal oversight of digital currencies, the news just hasn’t stopped.

But things are about to get even wilder: Signs are pointing to the Federal Reserve beginning to take steps toward issuing its own digital currency.

In late 2017, a top Fed official offered enthusiastic support for the promise of distributed ledger technologies in financial services, while another said that although it was “very premature to be talking about the Federal Reserve offering digital currencies … it is something we are starting to think about.”

Although the prospect of a digital dollar may startle some in corporate America, it should not. In fact, now is the time to recognize that the pioneers behind bitcoin and the other digital currencies did the global financial system and corporations a huge favor. More than a decade ago, these trailblazers leveraged cryptography to create a peer-to-peer network of transactions that support today’s digital currencies. The result is a platform that facilitates faster, cheaper and transparent transactions — transforming how business will be done going forward.

It is precisely this speed, cost-effectiveness and transparency that is motivating governments around the globe to embrace this newer technology — including the eventual issue of a U.S.-sanctioned, digital dollar.

Unconvinced? Consider recent events of governments around the world legitimizing cryptocurrencies. In the last few years, Russia, China, the U.K., France, Mexico, South Korea and numerous other countries have all introduced measures to ensure greater oversight of the cryptocurrencies and initial coin offerings being traded in their respective countries. Meanwhile, Venezuela plans to introduce its own digital currency in an effort to prop up its troubled economy.

The U.S., however, has been way ahead of this curve. As far back as 2013, the Financial Crimes Enforcement Network informed financial institutions that it was tracking virtual currency transactions to spot money laundering and other illegal activities.

More recently, U.S. lawmakers proposed extending that reach. Pending legislation, such as the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act promises to further expand federal control over digital currencies by criminalizing the concealment of digital currencies or digital currency accounts. This potential legislation harkens back to 2008 when once-clandestine Swiss banks were pressured to share bank account information with global law enforcement to identify tax evaders. Less than a decade later, Switzerland complied, phasing out its bank secrecy laws.

Although extending controls over digital currencies may strike some as government overreach, government interests are — and should always be — about protecting constituents through transparency. Regulating digital currencies would not only introduce needed transparency, it would help legitimize them by moving them away from those nefarious elements that continue to hamper mainstream recognition.

Case in point: When WannaCry ransomware was unleashed in 2017 by hackers demanding $300 in bitcoin to release infected computers, law enforcement appeared powerless. Now imagine how that scenario would play out if a government-sanctioned digital dollar was in use. Thanks to the peer-peer, distributed ledger technology supporting the currency, regulators would have full visibility into the transactions, and could immediately expose those behind WannaCry.

In the mid-19^th century, mining companies discovered an abundance of gold in the U.S. Initially this triggered disruption, but gold rapidly emerged as the fiat supporting the U.S. dollar, helping establish the U.S. as a global economic power. Now, we are seeing a variation of similar events play out, except today’s “miners” focus on capturing transactions on distributed ledger technologies.

Regulators and digital-savvy consumers have long demanded financial institutions deliver faster, cheaper and more reliable payments. Swift, the financial messaging service, emerged to meet those demands, but distributed ledger technologies and digital currencies are better equipped to do so. When a “Fedcoin” is eventually developed, consumers will embrace its convenience. Financial institutions and businesses will appreciate the efficiencies and regulators will welcome the transparency. In other words, all constituents in the financial ecosystem will benefit from a digital dollar and the Federal Reserve recognizes this.

In a world where consumers expect transactions to be completed in milliseconds — and technology has delivered on those expectations — a government-approved digital dollar is inevitable.