The federal reserve bank of St Louis has published a paper that attempts to define Bitcoin and whether it has a use case along with virtual and physical forms of money.
To do this, the bank used a number of dimensions to help them categorize the currencies, namely representation, transaction handling, and creation.
Representation deals with whether the currency is physically represented (like gold or cash) or virtually represented (like electronic money). Transaction handling deals with whether transactions are handled in centralized or decentralized payments, like electronic bank money and cash respectively. Creation distinguishes between currency that is created competitively (gold and bitcoin) or in a monopoly (fiat currency).
The bank published a chart that not only shows how they tend to categorize currencies but also demonstrates how Bitcoin defies categorization by these dimensions and is, in fact, a completely unique currency.
For example, central bank electronic money is created by monopoly, not by mining – only the bank can create it, unlike gold which anyone can mine. It is represented virtually, with no physical aspect to it. Unlike how central bank cryptocurrency would be handled, the transactions are centralized. This is very distinct to cash, which has completely decentralized transaction handling – no oversight or record keeeping is required for a cash transaction, and no trust is required between parties. There is no counterparty risk in the way that exists with centralized virtual money.
The bank points out that with gold and cash, ownership does not usually need to be proved, unlike with money used in centralized transactions. All of the parameters leave various currencies with their place in the chart, but Bitcoin, which has traits of all of the different types, needs its own section away from the rest.
Each form of money has its benefits and drawbacks. This is why many forms of money coexist.
Cash is Inefficient
The bank states that while different currencies have their uses, cash is inefficient, expensive to produce, and can only be used in person.
We believe there is great demand for a virtual asset issued by a trusted party that can be used to save outside of the private financial system.
The bank tracked the circulation of Swiss Francs from 1980 – 2015 and found that the circulation greatly increased directly after the global financial crisis of 2007.
The paper theorizes that cryptocurrencies can perform the function of cash without the many drawbacks associated with it. First, issues like scaling need to be addressed, which the bank feels will come in time.
Central bank money for all
The central bank proposes that it should issue centralized cryptocurrencies to fulfill the role of cash, which would protect customers from bankruptcy of commercial banks by further regulating them. For example, if each commercial bank was obligated to store central bank crypto funds in their branches, the bankruptcy of a commercial bank wouldn’t affect the central bank cryptocurrency funds stored there. Surprisingly, the bank states that there is a need for anonymous currencies as well.
History and current political reality show that, on the one hand, governments can be bad actors and, on the other hand, some citizens can be bad actors. The former justifies an anonymous currency to protect citizens from bad governments, while the later calls for transparency of all payments.
The reality is in between, and for that reason we welcome anonymous cryptocurrencies but also disagree with the view that the government should provide one.
Essentially, the paper states that there is and will always be a requirement for cryptocurrencies, but that due to concerns of money laundering and other financial crimes, it is not the role of the government to create them.