Should Crypto Stay Decentralized or Are CBDCs Better? Experts Answer

My former colleagues at the MIT Digital Currency Initiative have been doing excellent work with the Federal Reserve for several years, including building prototypes to help them explore the intersectional considerations of the technology and monetary policy.

Speaking for myself, I think there is real merit to fiat cryptocurrency as an important thing for the U.S.

First, there’s an opportunity here to address problems with our fractional reserve banking system. If I hold a $10 bill in my hand, I have a direct relationship with the U.S. government. But to hold $10 digitally, I need an intermediary.

A fiat cryptocurrency would allow me to have that direct relationship, digitally. This would have big economic implications, which are up for debate. It would undoubtedly put more competitive pressure on the fractional reserve banking system as some people will opt out. Perhaps my savings account interest rate of 0.05% goes up to encourage me to stay. Higher-growth-at-all-costs, pro-spending economists worry about hoarding (i.e., saving). Slow-burn, pro-savings economists argue increased competition promotes accountability and increased savings ensures more economic stability.

Second, there’s an opportunity in fiat cryptocurrency to resolve the trade-off between safety and financial inclusion with regard to Anti-Money Laundering (AML) regulations. AML plays a critical role in combating drug cartels, human trafficking, cyber crime, political corruption and terrorism, but it also has a disproportionately negative impact on immigrants, refugees and low-income people who suffer higher relative costs or are excluded outright.

Part of the problem is a fragmented data ecosystem inhibiting advanced forensic analysis of transaction data, such as graph learning to capture the complex “layering” schemes employed by money launderers. With a public, pseudonymous ledger, a fiat cryptocurrency could allow investigators to see the whole picture, identify suspicious activity, request warrants to deanonymize actors as needed and then take action as needed. This is in stark contrast to what we have now, with each bank being responsible for policing itself with incredibly limited information (its own) as sophisticated money launderers move across many banks and territories.