Should the Fed Create ‘FedCoin’ to Rival Bitcoin? A Former Top Official Says ‘Maybe’

If cryptocurrency and blockchain technology really are the future of money, the world’s central banks need to get involved, a former Fed governor argues.

Kevin Warsh in London in 2014. “It strikes me that a central bank digital currency might have a role to play,” he said Thursday night.CreditPool photo by Alastair Grant

Many enthusiasts of Bitcoin and other cryptocurrencies are motivated by deep skepticism of the central banks that control the world’s money supply.

But what if central banks themselves entered the game? What would happen if the Federal Reserve, or the European Central Bank or the Bank of Japan used blockchain technology to create their own virtual currencies? Besides, that is, having some cryptocurrency fans’ heads explode?

A former Fed governor — who was also a finalist to lead the central bank — thinks the idea deserves serious consideration.

“Most central banks have a view that these crypto-assets are clever, like guys in the garage did it and it’s kind of cool, or risky,” given the potential investor losses and widespread fraud, said Kevin Warsh, who was a governor at the Fed from 2006 to 2011 and was a top contender to become its chairman late last year when President Trump instead appointed Jerome Powell.

If he had returned to the Fed, Mr. Warsh said, he would have appointed a team “to think about the Fed creating FedCoin, where we would bring legal activities into a digital coin.”

“Not that it would supplant and replace cash,” he said, “but it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy.”

He added that blockchain technology, which allows reliable, decentralized record keeping of transactions, could be useful in the payment systems operated by the Fed, which enable the transfer of trillions of dollars between banks.

“It strikes me that a central bank digital currency might have a role to play there,” Mr. Warsh, who is now a distinguished visiting fellow at the Hoover Institution at Stanford, told several reporters Thursday evening.

Some central banks are already doing work in this vein, including the Monetary Authority of Singapore and the Bank of England. And Mr. Powell acknowledged the potential applications in his confirmation hearing for the Fed chairmanship in November, saying, “We actually look at blockchain as something that may have significant applications in the wholesale payments part of the economy.”

It would be quite a twist if a technology whose most ardent fans are motivated by distrust of central banks became a key tool for those banks.

But it would address some of the concerns connected to Bitcoin and its many privately created rivals. To the degree that the value of existing cryptocurrencies fluctuates wildly, they are ill-suited as a medium of exchange. Central banks have spent hundreds of years learning how to keep the value of money stable.

And to the degree Bitcoin and the like facilitate tax evasion, money laundering and fraud, they will be a target of global law enforcement. Central banks are used to building systems that allow enforcement of those laws.

It’s clear that central banks weighing use of blockchain technology don’t share the more anarchist impulses of some of the most die-hard cryptocurrency enthusiasts. But there may be more commonality than it might seem. As Mr. Warsh argues, if people really do believe that digital currencies in some form are the future of money, it would behoove central banks to treat them as more than a novelty.

“Congress gave the Fed a monopoly over money,” Mr. Warsh said. “And if the next generation of cryptocurrencies look more like money and less like gold — and have less volatility associated with them so they would be not just a speculative asset but could be a reliable unit of account — as a purely defensive matter I wouldn’t want somebody to take that monopoly from me.”

In other words, if cryptocurrency enthusiasts are correct that this technology could become a better way of carrying out even routine transactions, the Fed and its counterparts are the institutions that have the most to lose.

Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.”@Neil_IrwinFacebook

Blockchain Will Be Theirs, Russian Spy Boasted at Conference

Both of the delegates who recounted their conversations did so on the condition of anonymity, because discussions at the International Standards Organization, or I.S.O., are supposed to be confidential. Neither the Russian organizations overseeing the delegation to the I.S.O. nor the Russian delegates responded to requests for comment.


The blockchain “really does create the foundation for the future that is coming,” said Gilbert Verdian, the head of the British delegation working on blockchain standards at the International Standards Organization.

Tom Jamieson for The New York Times

The sentiment expressed by the Russian delegate is as clear a sign as any of the significance that some governments are assigning to the blockchain — a technology that is now being applied to things as varied as financial trading and voting — and the degree to which it is becoming a subject of geopolitical battles.

The Russian interest in the normally wonky technical sessions has caused concern among other delegations, who worry that individual countries could push standards that would make the security of the blockchain technology vulnerable to surveillance and attack.

The I.S.O., based in Geneva, was created in 1947 to ensure that important technologies are built or measured in the same way all over the world. Over the years, it has created standards for food safety, film sensitivity and much more.

Russia is not the only country sending high-powered delegations to the I.S.O. technical committee focusing on blockchain standards, which got its start last year. The 25 countries with committee delegations sent over 130 people to the last meeting to discuss matters like a common method for security. China sent officials from the finance ministry while the United States had delegates from IBM and Microsoft, according to participants.

“It is a very sought-out technology today, because it really does create the foundation for the future that is coming,” said Gilbert Verdian, the head of the British delegation working on blockchain standards at the I.S.O. and the founder of the company Quant Network. “To get behind it and back it now is going to put people at an advantage, either politically or economically.”

The original blockchain is the shared database on which all Bitcoin transactions are recorded. It is kept by a distributed network of computers managed by many people, rather than one central authority. While there are now many virtual currencies, each with its own blockchain, there are also many government and corporate efforts looking at ways to use blockchain technology to securely record other kinds of data.

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There are still significant questions about whether the technology will live up to expectations — and few projects have proceeded beyond the pilot stage aside from virtual currency networks like Bitcoin and Ethereum.

But in countries like the United States, China, Russia, Singapore and Switzerland, government groups have talked about using blockchains for myriad tasks, like issuing national currency or tracking identity records for citizens and visitors.

Within the young blockchain industry there is a widespread belief that the companies and countries that establish an early lead could guide the direction of the technology, for both commercial and national security purposes.

Emma Channing, a lawyer who frequently works with blockchain start-ups, recently raised an alarm about the intrigue at the I.S.O. standards group.

Ms. Channing said she was worried that countries that devote more resources to the process could successfully push their preferred cryptographic algorithms to be the standards, potentially creating so-called back doors that could be used in the future to spy on blockchain activity.

“In the context of software it is the perfect Trojan,” said Ms. Channing, a co-founder of the Satis Group, an American company that advises blockchain projects. “If something gets buried in it, these things will get adopted wholesale — and won’t be questioned on the way in.”

Ms. Channing recently emailed dozens of blockchain experts, trying to get them to volunteer as representatives to the I.S.O. delegations in their countries, so that the process does not become dominated by a few countries.

The chairman of the I.S.O. blockchain committee, Craig Dunn, rejected the idea that any country could shape the process. While I.S.O. proceedings are generally confidential, new standards must go through many stages, with many rounds of voting — first with smaller working groups and then with full national delegations.

CTCrypt 2017 — Standartisation of blockchain (Maxim Shevchenko) Video by BIS TV

“There has to be agreement and consensus across the member countries to take a standard forward,” said Mr. Dunn, who is also the head of the Australian delegation to the committee.

Few countries have made their interest in the blockchain as clear as Russia. President Vladimir V. Putin met briefly last year with Vitalik Buterin, the founder of Ethereum, the second most widely used blockchain-based virtual currency platform after Bitcoin.

Mr. Putin also put the blockchain at the center of his “Digital Economy” program for Russia, and his government has talked about creating a crypto-ruble, similar to Bitcoin.

One of the Russian delegates to the I.S.O. blockchain group, Maxim Shevchenko, gave a talk last summer in Russia in which he spoke about the country’s goals in the I.S.O. group. The bullet points on the slide included “possibility to influence the technology” and “implementation Russian standards and solutions worldwide.”

Another member of the Russian delegation, Alexey Urivskiy, told the Russian newspaper Vedomosti last year that the delegation at the I.S.O. committee was supposed to get Russian cryptographic algorithms into the standard. The Vedomosti article said that the head of the Russian I.S.O. delegation, Mr. Marshalko, was affiliated with the F.S.B.

Russia is not the only country pushing hard on the blockchain. Many Chinese government offices have been public about their interest in taking advantage of the blockchain technology for tasks like tracking people and products moving through industrial supply chains.

At the I.S.O. meetings last fall in Tokyo, the Chinese government sent one of the largest delegations, with at least nine people, including representatives from the finance ministry and the Chinese central bank, according to a delegate from another country who met the Chinese participants.

The United States delegation was led at the last meeting by a Microsoft employee and included a delegate from IBM. Microsoft and IBM are two of the global companies that have pushed hardest to develop blockchain technology.

At the first meeting of the I.S.O. blockchain group, the Russian delegation led a study group on security and privacy issues, which caused discomfort among some delegates from other countries, according to the two delegates who spoke to The New York Times. At a second meeting, oversight for these issues was transferred to a working group led by France.

Mr. Verdian, the head of the British group, said lots of delegations were jockeying to get an edge on the new technology.

“It will change how our society can operate, but at the same time, in harnessing this technology people might want to leverage that for their own gain,” he said. “We all owe it to each other to do it right so that it benefits all of us rather than a few.”

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A Former Top Wall Street Regulator Turns to the Blockchain

“There is a strong case for both of them — but particularly Ripple — that they are noncompliant securities,” he said in an interview. He believes that Bitcoin, the original virtual currency, can remain exempt from securities regulations.

Mr. Gensler will be one of the most influential voices to weigh in on a series of questions that are likely to shape the future of the nascent industry.

The Securities and Exchange Commission and the agency that Mr. Gensler led from 2009 to 2014, the Commodity Futures Trading Commission, are in the middle of determining how to categorize and crack down on many of the virtual currencies created in recent years.

Most of the focus has been on smaller currencies that were issued through so-called initial coin offerings, or I.C.O.s, a method of fund-raising in which entrepreneurs sell custom virtual currencies.

But Mr. Gensler believes that better-known virtual currencies like Ether and Ripple should be in that conversation as well and should likely be categorized as securities, given the way they have been created and sold.


Mr. Gensler, right, in 2013, when he was the chairman of the Commodity Futures Trading Commission.

J. Scott Applewhite/Associated Press

“2018 is going to be a very interesting time,” Mr. Gensler said. “Over 1,000 previously issued initial coin offerings, and over 100 exchanges that offer I.C.O.s, are going to need to sort out how to come into compliance with U.S. securities law.”

The people behind both Ether and Ripple have argued that their tokens are not securities. But there are signs that the S.E.C. could be receptive to Mr. Gensler’s argument. Regulators have indicated in private meetings with industry participants that they are considering whether Ether should be categorized as a security.

All the outstanding Ether were worth around $65 billion at Sunday’s price, while the Ripple tokens in the hands of investors are worth around $35 billion.

If they are deemed to be securities, it could become illegal for Americans to trade them on most of the exchanges where they are now traded. That would make it harder to buy and sell them and depress their prices.

Mr. Gensler developed a reputation for standing up to powerful financial interests when he was the head of the Commodity Futures Trading Commission.

Before he got into office, some worried that his background at Goldman Sachs would make him hesitant to take on the big banks. But as the chairman of the commission he became one of the most aggressive watchdogs in the effort to rein in Wall Street after the financial crisis.

Joi Ito, the director of the M.I.T. Media Lab and a member of the board of directors of The New York Times, said the combination of Mr. Gensler’s record of independence and his knowledge of finance and policy was what made him so attractive to M.I.T.

Mr. Ito has built the Digital Currency Initiative at the Media Lab in an effort to gather a collection of virtual currency experts who don’t have a financial interest in them, though the initiative does provide financial support for some developers working on the Bitcoin software.

“It’s important that you have a core group of people who aren’t in it for the money, and who care about the proper architecture for the long run,” he said.

Mr. Gensler has a dual appointment as a special adviser to the Media Lab and a senior lecturer at the M.I.T. Sloan School of Management, where he will teach a class on the blockchain in the fall.


Mr. Gensler said he believed 2018 would be a year of reckoning for virtual currencies. “Over 1,000 previously issued initial coin offerings, and over 100 exchanges that offer I.C.O.s, are going to need to sort out how to come into compliance with U.S. securities law,” he said.

Kayana Szymczak for The New York Times

The original blockchain is the ledger on which all Bitcoin transactions are recorded. The Bitcoin blockchain is updated by a network of computers so that no central authority is needed.

While most blockchain experiments are in an early stage, Mr. Gensler said he had become convinced that blockchain structures could challenge or replace many of the middlemen in the financial industry.

For now, though, his words are likely to have their greatest impact on the quickly evolving debate about how virtual currencies should be regulated.

Most industry experts, including Mr. Gensler, assume that Bitcoin is safe from being categorized as a security because it was not originally issued through an initial coin offering or a central organization, and the software is maintained by a decentralized group of developers. Some other large virtual currencies, like Litecoin and Monero, have similar designs.

But Mr. Gensler said Ether could have more problems because the first Ether tokens were sold in 2014, before the network was functional, by the Ethereum Foundation.

Ether could get off the hook, Mr. Gensler said, because its development has been more decentralized recently, and new Ether tokens are now given out to so-called miners through a network.

Aya Miyaguchi, the head of the Ethereum Foundation, said in an email that the foundation “neither controls the supply of nor has the ability to issue Ether, and the quantity of Ether that the foundation holds (under 1 percent of all Ether) is already lower than that held by many other ecosystem participants.”

But Mr. Gensler said it would be much harder for the Ripple token, known as XRP, to avoid being categorized as a security. The company that oversees Ripple’s development still holds most of the XRP tokens and does most of the work to make the software and the token valuable, he said.

A spokesman for the company Ripple, Tom Channick, said XRP should not be a security.

“XRP does not give its owners an interest or stake in Ripple, and they are not paid dividends,” he said. “XRP exists independent of Ripple, was created before the company and will exist after it.”

Mr. Gensler, who has no virtual currency investments, said he was not tied to any coin’s winning the race. But he does think changes are necessary before the blockchain experiments can go mainstream.

“I would be surprised if 10 years from now this isn’t somewhere in the financial system in a meaningful way,” he said. “But so much of the stuff that is being promoted now will not be around.”

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Inside Cambridge Analytica’s Virtual Currency Plans

The effort was overseen by Cambridge Analytica’s British chief executive, Alexander Nix, who was forced out of the company in March after he was caught on tape bragging about his company’s approach to political work in other countries, including the use of shell companies and strategies designed to entrap opponents. The Facebook data revelations and Mr. Nix’s comments appear to have put the virtual currency work, which was still in the early stages, on hold.

Initial coin offerings, or I.C.O.s, are a method of fund-raising in which companies sell their own virtual currencies. The tokens are generally structured like Bitcoin, using a so-called blockchain to record transactions. The coins are usually designed to be used as an internal payment method in software that the start-ups are building. Over the last year, companies have raised over $6 billion through I.C.O.s.

The New York Times Explains…

Coin offerings generally avoid the regulatory oversight that accompanies traditional fund-raising methods, opening the door for significant fraud. A number of coin offerings have been shut down by law enforcement, and there are several broad investigations of the industry by regulators around the world.

“There are only a handful of more controversial areas it could have expanded its business into,” said Tim Swanson, a consultant to companies in the industry, who was briefed on the Cambridge Analytica coin offering.

A spokesman for Cambridge Analytica did not respond to multiple requests for comment.

Cambridge Analytica began working with coin offerings in the middle of last year. The business was guided by Ms. Kaiser, an American who led the company’s business development and previously appeared at a press event with organizers of the “Brexit” campaign to get Britain out of the European Union.

Cambridge Analytica boasts that its “psychographic profiles” of voters and consumers allow for more persuasive and precisely targeted advertising. In marketing material sent to investors, the firm said Ms. Kaiser was “helping blockchain companies in using predictive modeling to target investors for token sales.”

Jill Carlson, a consultant who has worked with several blockchain companies, attended meetings where Cambridge Analytica pitched its services to virtual currency companies, including one that Mr. Nix attended.


Wan Kuok-koi, center, a Macau gangster, after his release from prison in 2012. Documents have listed Mr. Wan as a supporter of a Dragon Coin, a digital token promoted by Cambridge Analytica.

Laurent Fievet/Agence France-Presse — Getty Images

Ms. Carlson said the Cambridge Analytica employees had bragged about their success in helping get President Trump elected and their ability to carefully target advertising campaigns using data from social networks like Facebook.

She also remembers they spoke about an array of potential campaigns. The most unusual idea involved sending virtual currencies to people in far-flung regions of Mexico. The payments would give people incentive to fill out surveys and get data that could then be used to help design campaigns for Mexican political candidates.

Ms. Carlson said the pitch was contrary to the ideas of openness and transparency that drew her to virtual currency projects like Bitcoin.

“The way that Cambridge Analytica was talking about it, they were viewing it as a means of being able to basically inflict government control and private corporate control over individuals, which just takes the whole initial premise of this technology and turns it on its head in this very dystopian way,” she said.

Cambridge Analytica did win over some clients. Last summer, Ms. Kaiser’s team began working with Dragon Coin, a new virtual currency that was designed to be used by gamblers. The coin was supposed to make it easier for people to get their money to casinos in Macau, an island that is technically a part of China with some independent political structures.

Cambridge Analytica had little public role in promoting Dragon Coin. But behind the scenes the company emailed potential partners and investors and arranged for some of them to take all-expenses-paid trips to a glitzy Dragon Coin event in Macau.


Brittany Kaiser, who guided Cambridge Analytica’s work with initial coin offerings, has been critical of the company since leaving it in February.

Stefan Wermuth/Reuters

The South China Morning Post published a photo from the event showing Wan Kuok-koi in attendance. Mr. Wan is known as Broken Tooth Koi from his days as the leader of the famous 14K gang in Macau. He was released from prison in 2012 after serving a 14-year term.

The founder of Dragon Coin, Chris Ahmad, told Business Insider at the time that Mr. Wan “is not involved in Dragon, and he is not financing Dragon in any way.”

But documents sent in September to potential investors by Dragon Coin’s co-founder Paul Moynan listed Mr. Wan as the sponsor of the initial coin offering and included his picture. Ms. Kaiser was included in the email. A separate Dragon Coin document that Mr. Moynan sent out at the same time listed Mr. Wan as one of a few high-profile supporters of the project.

When reached recently, Mr. Moynan initially said that his email address had been hacked and that he did not recognize the documents. He later said the documents were a “hypothetical wish list” of a “junior staff” member.

“We will be conducting an internal investigation, as unfinished draft documents would never have been indicative of actual agreed partnerships,” he said.

Ms. Kaiser said that her work on the Dragon Coin event in Macau had been done in a personal capacity, and that the Dragon Coin team had told her that Mr. Wan was not involved with the project.


The Manhattan location of Cambridge Analytica, a British company. Its virtual currency work, which was still in the early stages, now appears to be on hold.

Joshua Bright

Dragon Coin claimed it raised over $300 million from investors last fall. That total has been hard to verify. But like many coin offerings, Dragon Coin has failed to live up to its promises.

The document sent to investors in September said Dragon Coin had secured a partnership with Visa to release a debit card that would work on the Visa network. A spokeswoman for Visa said that there was no partnership and that no Dragon card had been approved, as is necessary for a card to be issued.

The documents last summer also said the Dragon app, which would let investors use its virtual coin, would be available in September. When that didn’t happen, the company promised the app in January — but it still has not appeared. In the meantime, the company has spent its money sponsoring a Formula E car racing team and a team climbing Mount Everest.

The setbacks did not stop Cambridge Analytica from plunging further into the virtual currency realm. The company’s New York office continued reaching out to potential investors and partners, emails show. And in January, Ms. Kaiser hosted a side conference dedicated to blockchain projects, known as CryptoHQ, at the World Economic Forum’s annual conference in Davos, Switzerland. Mr. Nix spoke on a panel at the event.

He said that the technology would be helpful in solving the very problems that Cambridge Analytica has since become the emblem of — the abuse of online personal data.

“We’re going to see a new type of economy emerging where people can start to take ownership of their data and monetize on their data,” Mr. Nix said, according to a tweet from the CryptoHQ account. “And that is only possible through the blockchain.”

The virtual currency that Cambridge Analytica was designing was aimed at exactly this problem, and would have also helped the company raise money from investors.

The company wrote a document describing the technical specifications of the coin, Ms. Kaiser said. Her account was confirmed by another person who worked on the project and agreed to speak on the condition of anonymity. The work was overseen by Alexander Tayler, the firm’s chief data scientist and briefly the interim chief executive after Mr. Nix stepped down.

Ms. Kaiser left Cambridge Analytica in February and has been sharply critical of the company since then. As far as she knows, the coin offering has not moved forward. But she is still working on similar concepts at her new consulting firm, Bueno Capital.

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