The St. Louis Federal Reserve has published an essay critically evaluating the notion of cryptocurrencies that are issued by central banks. The article is highly dismissive in presenting what it describes as "the non-case for central bank cryptocurrencies," concluding that "a central bank will not issue cryptocurrencies in the sense of a truly decentralized and permissionless asset that allows users to remain anonymous."
St. Louis Fed Argues That Cryptocurrency Comprises Unique Monetary Form
In presenting their argument, the research paper's authors, Aleksander Berentsen and Fabian Schar, first seek to define the unique qualities of bitcoin and articulate the properties that differentiate cryptocurrencies from other monetary forms.
Berentsen and Schär argue that different monetary forms are characterized by three dimensions: representation, transaction handling, and money creation. The paper asserts that "the distinguishing characteristic of cryptocurrencies is the decentralized nature of transaction handling, which enables users to remain anonymous and allows for permissionless access."
"In theory," Berentsen and Schär assert that "a central bank could easily introduce a central bank cryptocurrency." It is proposed that central banks "could attach additional value components to fractions of existing cryptoassets, such as Bitcoin." The authors also suggest that "Ethereum's ERC20 or ERC223 token standards [can] be used to create new fungible tokens that are compatible with the Ethereum blockchain's infrastructure", or […] "Finally, a central bank can develop a brand new blockchain." The paper poses all "approaches are fairly straightforward to implement and would allow for the issuance of a central bank cryptocurrency on a public blockchain."
Decentralization as Defining Quality of Cryptocurrency
Despite the many means available through which a central bank could issue a cryptocurrency, the authors state that "the key characteristics of cryptocurrencies are a red flag for central banks. That is, no reputable central bank would have an incentive to issue an anonymous virtual currency."