Federal Reserve Bank Sees Big Innovation in Bitcoin

The Federal Reserve Bank of St. Louis, one of 12 regional Federal Reserves that make up the US Federal Reserve, has published a study into how Bitcoin fits into the current monetary system and whether it makes sense for central banks To spend cryptocurrency.

The Federal Reserve of St. Louis has divided actors involved in “money” into various dimensions. Bitcoin is in the “dimensions” virtual, decentralized and competitive.

All together with no surprises, if you have ever dealt with the subject of Bitcoin. Logically, Bitcoin is not physical, has no central authority that outputs Bitcoin and is not monopolized, but can be mined by anyone.

The Federal Reserve of St. Louis emphasizes that the Bitcoin system is an innovative invention that has the potential to revolutionize the current way currencies and the financial system work:

Like mining gold, Bitcoin mining is also exposed to miner competition. Everybody basically has the opportunity to participate in the process:

A central bank-based cryptocurrency

Right at the beginning of this section, the study indicates that each form of money has its advantages and disadvantages, and therefore several co-exist side by side:

In particular, the study indicates that cash has significant benefits. So it is anonymous and subject to no permission. There is also no record of cash flow. Since it is physical, it cannot be technically attacked (e.g. by hackers).

Nevertheless, the study believes that cash could soon end. The bank believes that cryptocurrencies are a real alternative to cash and will replace cash in the long term when problems such as scalability, high fees and acceptance are resolved. In particular, it calls the Bitcoin Lightning Network as one of the possible solutions to these problems.

To prove this, the researchers followed the behavior and circulation of the Swiss franc against the Swiss GDP from 1980 to 2017 and found three phases. In Phase 1 from 1980 to 1995, digital innovations replace the use of cash. The Swiss population has increasingly resorted to debit and credit cards for payments during this time.

In Phase 2 from 1995 to 2008, online banking was added to the card payments, with online banking only gradually gaining the trust and replacing card payments. The use of cash remained constant. The third phase lasted from 2008 to 2017 and marked a turning point due to the global financial crisis. The population increasingly resorted to cash.

As time passes, this will change again, according to the Central Bank of St. Louis. In particular, new technologies like Bitcoin will take some time to gain acceptance.

With regard to a central bank-based cryptocurrency, the study states that it would be easy for central banks to issue a currency.

However, the Bank’s research group considers this unlikely. The researchers say that no reputable central bank has enough incentive to spend cryptocurrencies, as the logistical burden on KYC (“Know Your Customer”) and AML (“Anti-Money Laundering”) and the risks of cryptocurrency are too high.

The study concludes that, although some central banks are examining the issuance of a central bank cryptocurrency. However, a closer look at these projects shows that these are not cryptocurrencies as shown above. Rather, they are “only” digital currencies issued by a central bank.

All in all, the study thus brings no “earth shattering” knowledge with it. However, there is a clear positive attitude towards Bitcoin.

Author: Marko Vidrih @cryptomarks



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Marko Vidrih

Most writers waste tremendous words to say nothing. I’m not one of them.