One of the central ideas behind the development of Bitcoin was to break the monopoly of central issuance of currency. Yes, Bitcoin also has many benefits as a payment system and makes it easier to transfer value between and among individuals than through the banking system, but it was primarily designed to overcome the problem that central issuers of currency tend to abuse their money-creating privileges to the benefit of themselves and their cronies. Just look at the Federal Reserve System, which has increased the money supply tremendously under its watch, enriching Wall Street and impoverishing Main Street. Bitcoin, on the other hand, is limited to 21 million bitcoins. Once the total supply is mined, no more can be created. There is no central authority that can create more currency ad infinitum. That kind of stability is attractive to people who are tired of seeing the purchasing power of their money decreasing day by day due to central bank monetary policy.
The fact that central banks are even discussing issuing their own Bitcoin-like digital currencies shows how out of the loop they are. They are treating Bitcoin and cryptocurrencies as a fad that they have to come to grips with. Digital currencies are gaining a foothold not because they are a new-fangled fad or convenient to use, but because they are more trusted than currencies issued by central banks. If the Federal Reserve were to create “FedCoin”, it would never gain any traction in markets against Bitcoin or other cryptocurrencies. It would be a joke. The only way it would be able to compete is the same way that central bank-issued currencies always have competed – by raising legal barriers to drive out their competition.
If central banks decide to start issuing their own digital currencies, expect to see regulations introduced that forbid banks and financial institutions from dealing with competing currencies such as Bitcoin. You should also expect the central bank to abuse its authority and issue digital currency as promiscuously as it creates create money today. In fact, most money today is digital already. Even though bank deposits are theoretically able to be redeemed in cash (Federal Reserve Notes), this is rarely ever done. How many people use cash as a sizeable portion of their spending, as opposed to transferring balances from their bank accounts through the use of credit or debit cards, checks, or online bank transfers? Bank deposits are, for all intents and purposes, equivalent to cash.
When the Fed creates money it isn’t running an actual printing press, it is creating it all digitally. It creates money from nothing and uses it to purchase assets from financial institutions as though it is real money. Those digital bank deposits are accepted universally as the equivalent of cold, hard cash. Putting a cryptocurrency spin on a central bank-issued digital currency is just putting lipstick on a pig. By the time you subject a hypothetical “Fedcoin” to anti-money laundering laws, Know Your Customer laws, and run it through the banking system, you’re left with a bloated and pale imitation of Bitcoin, and something not too dissimilar from existing digitally-created money. If governments and central banks are allowed to have their way, that may end up being the future of cryptocurrencies.