Bitcoin Series 33: FedCoin, revisited

One of the final exam questions for the Open Financial Systems course I co-taught on the MSc in Digital Currency Program at the University of Nicosia was "If you were asked by the Federal Reserve to design a US Dollar cryptocurrency (a "FedCoin"), what would the design parameters be?"

Since the course is over, I will give my answer to this question.

Basic Design Parameters

  1. The wallets should be completely open to any human or machine user without pre-approvals, KYC or any other gating process. 
  2. No one party should have the ability to block transactions.
  3. It should trade at a 1:1 ratio to the US dollar (otherwise, why bother doing this?)

I understand one could design a FedCoin with other parameters but this is my FedCoin so I get to pick the parameters.  In my opinion, if you loosen #1 or #2, you might have a perfectly useful national digital currency but you no longer have a cryptocurrency or a FedCoin.


  1. A Bitcoin clone (alt-coin) would be fine with some changes in the issuance structure. 
  2. Pick a value in USD for how much FedCoin you want to start with.  Today Bitcoin has a market value/supply of $3B.  Let's be generous and say that, in time, demand would be for $100B of FedCoin (It does not really matter what value you pick as we will see below because you won't issue most of the coins unless needed.  In fact, this value could be arbitrarily large and would be better if it was larger rather than smaller).
  3. Target 1 FedCoin to equal 1 US Dollar for ease of use.
  4. Pre-mine, say, $80B worth of FedCoins and hold them at the Federal Reserve.
  5. Have Bitcoin-like mining rewards (new coin issuance and transaction fees) with new coin issuance diminishing over time under the principle that there will be more transactions in the future than in the present.  You won't have to get this exactly right because, if point 8 is well executed, there will always be sufficient transaction security due to Federal Reserve mining capacity.  
  6. Have an unlimited standing policy to buy any number of FedCoins for $1 or sell any number of FedCoins for $1 (you can use the premined FedCoins for selling).  

    This ought to maintain a stable exchange rate.   Nobody would willing sell for less than $1 if the Federal Reserve is buying for a $1 and nobody would buy for more than $1 if there is an effectively unlimited sell order at the Federal Reserve for $1, so long as there weren't onerous restrictions on buying/selling.  

    Note that the pre-mined coins are not an increase in the US money supply as a dollar is redeemed in exchange for a FedCoin.  The mining rewards are an increase, albeit trivial, in terms of US money supply, so I suppose the Federal Reserve would need to incorporate that into its overall money supply targeting (or just have the Treasury fund the fees).
  7. Presumably there would be dealers that aggregate buying/selling volume with the Federal Reserve but it should be allowable for individuals to come make a trade of FedCoins for USD or vice-versa.  The goal is to have sufficient openness for people to take advantage of the Fed buy/sell offer to avoid dealers adding significant markups for access.
  8. Commit to maintaining sufficient Federal Reserve mining capacity to prevent any other party from gaining 51% control of the network, but to not exceed 51% under the Fed's control. 

    In other words, adjust Federal Reserve mining capacity up or down as needed.   This is out of enlightened self-interest as FedCoin is more credible if the Fed is not monitoring/potentially blocking transactions.

    Be transparent with statistics about the Fed's mining power.


  1. "But the Federal Reserve couldn't just let [drug dealers/terrorists/enemy states] use FedCoins so we need some account sign up process"

    So long as the Federal Reserve still issues cash, this is a specious argument.  Despite that, I can see that being potentially a mental hurdle.
  2. "What is the advantage of this vs. Bitcoin?"

    Creating a cryptocurrency whose value matches the unit of account in the largest economy in the world.  That has value.  

    To the degree that enough market liquidity & hedging instruments emerge in time in Bitcoin to allow one to trade in USD but using the Bitcoin blockchain (at reasonable hedging costs), then the value of a FedCoin diminishes substantially.   I think this will happen in time, it is just a question of how long that will take.
  3. "Shouldn't the Federal Reserve give individuals access to have depository accounts at the Federal Reserve instead?"

    Yes, the Federal Reserve should probably do that also, but that is something different.
  4. "Allowing competitive mining is wasteful of energy/resources"

    Operating a broad-based retail payment network (cash, credit, debit) at a cost of $0 is a fantasy.  In fact, it appears that many of the existing payment networks consume resources that are measurable in points of GDP so I think this is a silly parameter to add.
  5. "I want to conduct monetary policy with my Fed cryptocurrency"

    No, that is a bad idea.  Existing mechanisms are better.   In the context of an existing national currency, FedCoin is just cash for the 21st century (a payment mechanism) and should not attempt to serve a monetary policy also.
  6. "Bitcoin is 'hard' finite money, FedCoin is just the plain old US dollars"

    So what?  Anyone who thinks that bitcoins have greater appreciation than US dollars will hold bitcoins.  And vice-versa.


  1. "Should this happen?"

    It would be a neat preemptive move by the Federal Reserve if done early.

  2. "Will this happen early?"

    I doubt it.  A lot of people would have to sign off on such a move and "concerns would be raised" :)

  3. "Will FedCoins happen eventually for various national currencies?"  

    Yes, I think so, eventually.

  4. "Will that kill Bitcoin?"  

    Probably not, there would be co-existence, particularly if Bitcoin is given the field to itself for a while.

  5. "Who will do this first?"

    One of the smaller countries that has a decent financial services industry and would view this as a cool promotional tool (the way Estonia has implemented 'e-citizenship').

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Posted on March 29, 2015 .