NY-Fed Pres. Dudley, following Japan & Russia, discusses Fed-backed cryptocurrency

This is from CNBC last Wednesday: " Federal Reserve starting to think about its own digital currency, Dudley says."

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William Dudley, president and CEO of the Federal Reserve Bank of New York, said at a conference Wednesday that the Fed is exploring the idea of its own digital currency, according to reports from Dow Jones.

Any product likely would be well off in the future, he said, adding that it would be "very premature" to estimate when the Fed would come up with its own offering, according to Bloomberg.

That sentiment comes even though Dudley said he views bitcoin is "more of a speculative activity" and not a stable store of value.

As the central bank official spoke, bitcoin struck a new high. Just a day after hitting $10,000, it eclipsed the $11,000 mark.

Dudley is not the first Fed official to address the surging popularity of bitcoin.

Philadelphia Fed President Patrick Harker, in remarks made at a conference in September, said he doubted bitcoin would ever undermine the U.S. dollar, primarily because it lacks the backing of a government.

"The paper that's in your pocket, that we call money, only has value because we believe it has value, because we believe the government stands behind it. It's all trust issues," Harker said, according to a Coindesk report.

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This mostly mirrors what I've always thought about Bitcoin and its offshoots--i.e., that it's a potential revolutionary development in monetary policy, but that it will only be fully effective once it becomes adopted by central banks.

The Fed seems to be a very long way (3 years? 5 years? 10 years?) away from adopting this, but it's interesting that recent moves by the BoJ and the BoR may be forcing the Fed to act more quickly than it would otherwise want to do.

Japan is the most ahead of the game here ( LINK), as the Mizuho Financial Group is leading government efforts to introduce the J-Coin before the Jul-Aug 2020 Summer Olympics in Tokyo.

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The Financial Times reported Tuesday that a consortium of banks including Japan Post Bank was involved and that the J-Coin would launch in time for the Tokyo Olympics in 2020. The Mizuho spokesperson declined to comment on the involvement of other banks or the timeline.

However, the spokesperson told CNBC that there hasn't been any approval from regulators yet and provided more details on the plans for the digital currency.

"This will be pegged with Japanese Yen, and hopefully used to make payments and transfers through a mobile phone app," the bank said.

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Japan's government has also been open to the idea of digital currencies. Earlier this year, bitcoin was legalized as a legal payment method in Japan and large retailers began accepting the cryptocurrency. But cash is still heavily used in Japan. The J-Coin could be a way to wean Japanese society off of cash.

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Additionally, the Mitsubishi UFJ Financial Group (MUFG) is also developing the MUFG coin ( LINK), which might act as a sort of backup to the J-Coin's development.

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J-Coin is also meant to impact the country’s heavy use of cash, which accounts for 70 percent of all transactions.

“We like cash, because Japan is a very safety-conscious country, but cash is not so productive so we have to change the structure from cash to electronic money,” added Sato.

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It’s unclear if the digital currency will be accepted or even successful. Alongside its own development, the Mitsubishi UFJ Financial Group (MUFG) is testing a blockchain-based currency called the MUFG coin, which could affect J-Coin in the future.

While the company has been asked about joining other banks supporting J-Coin, it has responded by saying that it wants “MUFG coin’s results and know-how to be used across Japan, including by other banks, but have not decided on what concrete measures to take.” Over 1,600 MUFG employees currently use the currency to pay for expenses.

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Meanwhile, the Central Bank of the Russian Federation seems to just be waking up to the possibilities of issuing its own cryptocurrency, mostly as a means of staying a step ahead of the ECB. In fact, Russia’s finance minister, Anton Siluanov, seems to have been the first person to officially discuss the possibility of the CryptoRuble, just a couple of months ago: " Russia Plans 'Cryptoruble' Cryptocurrency: 'If We Don't Do it, Europe Will'."

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Similar to bitcoin, the CryptoRuble cryptocurrency will be underpinned by a online ledger known as a blockchain. Unlike bitcoin, however, it will not be possible for people to mine the virtual currency—the process of confirming cryptocurrency transactions and adding their record to the blockchain in order to generate new units of the currency.

Local reports cited by cryptocurrency news website CoinTelegraph revealed that CryptoRubles can be exchanged for rubles, though a 13 percent tax will be levied if the holder is unable to explain where the CryptoRubles came from.

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Russia’s finance minister, Anton Siluanov, said in an interview last week that cryptocurrencies are a “fact of life” and hinted at his country’s plan to become more involved in the digital currency space.

Siluanov said Russia planned to regulate the circulation, trading and mining of digital currencies in order to generate tax revenues and protect people and investors.

“Cryptocurrencies are a fact of life,” Siluanov told CNBC. “We need to create a legal framework for these operations, we need to control these operations if these operations contravene the law, including money laundering legislation."

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Siluanov’s comments came just days after Russian President Vladimir Putin said cryptocurrencies like bitcoin were used for criminal activity and would therefore be blocked by the country’s central bank.

“The usage of cryptocurrencies carries serious risks,” Putin said. “I know the central bank’s position on that. Cryptocurrencies are issued by an unlimited number of anonymous bodies. Thus buyers of cryptocurrencies could be involved in unlawful activities.”

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That bit about needing to clamp down on illegal criminal activities is of course typical doublespeak from Russian propaganda. Russia's government is effectively a hybrid-state mafia organization, so they love using cryptocurrency to evade international financial regulatory schemes. The fear seems to be that if cryptocurrencies become "official" currencies of the BoJ and ECB, then the price and usefulness of other currencies like Bitcoin will plummit, leaving the Russian criminal state with no safe way of continuing their business dealings. Thus, the perceived need to create the CryptoRuble, and ominously declare a 13% tax on anyone who can't justify his CryptoRuble holdings to Putin's government.

The Japanese motivation seems to be more benign, but also essentially about controlling and monitoring transactions, and forcing Japanese society away from using physical cash to avoid taxes and regulations.

Coincidentally, in countries with the highest degree of economic and financial freedom, like Switzerland, there is an unusually high amount of physical cash held by individuals, and an unusually high amount of transactions conducted by cash rather than credit.