The Cryptocurrency that Dare Not Speak Its Name

The Federal Reserve appears to have looked at Bitcoin as a potential set of rails for real-time payments in the banking system but shelved the concept for now.

The agency's white paper on improving the payments system, released Monday, coins a new euphemism for Internet cryptocurrencies (of which Bitcoin is by far the best known): "Digital Value Transfer Vehicles." These are defined as "decentralized digital stores of value that can be exchanged."

One such transfer vehicle, which goes unnamed in the paper, "was not considered a sufficiently mature technology at this time, but was identified for further exploration and monitoring given significant interest in the marketplace," the Fed said. Of the hundreds of cryptocurrencies that have sprouted up in the last few years, we're pretty sure the Fed is not referring to HoboNickels or PhilosopherStone.

However, the white paper acknowledges similarities between the Cryptocurrency That Dare Not Speak Its Name and one of the design options that the Fed deemed worthy of closer consideration.

Like Bitcoin, this option would take advantage of the distributed architecture of the Internet to facilitate direct messaging between parties at a lower cost than a hub-and-spoke model would. Distributed networks, first envisioned by the computer scientist Paul Baran in a 1964 paper, are "the ultimate form of decentralization," write Wall Street Journal reporters Paul Vigna and Michael J. Casey in their forthcoming book "The Age of Cryptocurrency." "No single entity anywhere has control over the system, which means it has no vulnerable point of attack."

Unlike Bitcoin, however, the parties in the Fed's Option 2 would be financial institutions, not individual users (and the Fed notably uses the term "point-to-point" instead of "peer-to-peer"). And very much unlike Bitcoin, which relies on a distributed public ledger known as the blockchain, Option 2 calls for a central ledger and a central authority to set the rules.

During a conference call with reporters Monday, Fed staffers were asked why the paper made no mention of Bitcoin. They responded by saying that they plan to monitor developments with digital currency, and that later, as those technologies mature, regulators will possibly have a different strategy.

It's understandable why the Fed might be reticent to wholeheartedly embrace Bitcoin's distributed model, and not only because of the currency's association with black markets. As Vigna and Casey write,

Without a CEO in charge of the currency or anyone to subpoena, how do you control the bitcoin economy? The law is designed to deal with centralized institutions in which identifiable managers are deemed responsible for an organization's conduct.

More on the Fed's white paper here.

Marc Hochstein is the editor in chief of American Banker. The views expressed are his own. He owns some bitcoins, but he owns a lot more U.S. dollars.