In 2009, Satoshi Nakamoto served the world an entirely new kind of cur- rency. It was one that people could move over the internet instantaneously and nearly free of charge. Issued
and distributed not by a central bank
but by its own users, it drew the drapes
of privacy around financial transactions
while making forgery—in theory, at least—
It’s nine years later, and there are now
24 million active Bitcoin wallets in use
around the world. The value of a single
bitcoin has risen from about a dollar in
2011 to as high as $19,700 in late 2017.
But success, of course, breeds competition. And Bitcoin is now clearly the dominant cryptocurrency; as of this writing, in
early April, its market cap was three times
that of Ethereum, its nearest competitor,
and roughly equal to those of all other
Yet while Bitcoin has established
an economy in which it’s impossible to
forge transactions, it provides no defense
against replication of the idea itself. No
one can copy an individual bitcoin, but
anyone can copy the idea of Bitcoin. So
how might a government, or a corporation,
or even ordinary people, go about doing
so in a way that makes Bitcoin useless or
redundant? Here are a few scenarios.
Option one: Government takeover
The year is two-thousand-something-big, and it’s the day your taxes are due.
But you don’t file them. Instead an algorithm automatically makes a withdrawal
from your electronic wallet, in a currency
It’s the digital version of those crunchy
bills you only vaguely remember from
many years ago, back before the central banks began taking paper cash and
redeeming it for fedcoins. Over the years,
you’ve seen less and less hard currency. You
don’t need it anymore, not when you can
walk into a local bank, verify your identity,
and set up a wallet on your phone. Sure,
you still have a few dollar bills. But they
are tucked away as souvenirs.
This hypothetical technology—a
central-bank-issued digital currency
built with a tweaked version of the Bitcoin blockchain—was described by David
Andolfatto, a researcher at the Federal
Reserve Bank of St. Louis, and later refined
by Sahil Gupta, who as an undergraduate
at Yale wrote a study on how a currency
like Fedcoin would work. With some colleagues, he wrote code to test a simulation.
In their system, a blockchain records
transactions, just the way it happens with
Bitcoin. Instead of being updated by a network of unaffiliated peers, however, the
Fedcoin ledger is managed by institutions
certified by the Federal Reserve. “These
authorized nodes could be things like Bank
of America, JP Morgan—basically, trusted
institutions,” Gupta told me.
Each bank is responsible for a chunk
of addresses on the blockchain. When new
transactions come through, the bank validates them in a new block and sends it to
the Fed. The Fed then acts as the final arbiter, checking the entries and unifying the
blocks into a master version of the blockchain that it makes public.
To use fedcoins, people must first show
proof of identity and set up a wallet with
the Federal Reserve or an affiliate bank,
at which point they can buy the new currency with US dollars at a one-to-one ratio.