What would happen if Bitcoin’s and Ethereum’s biggest competitor in the cryptocurrency space was the U.S. Federal Reserve? A new report issued by the Bank for International Settlements (BIS) considers whether central banks should issue their own cryptocurrencies. It looks at both retail and wholesale options, as well as payment systems that are blockchain-based versus those more centralized. In this post, we’ll focus on the option most like Bitcoin and other private cryptocurrencies: a central bank-issued retail cryptocurrency that uses distributed ledger or blockchain technology. The comparison illuminates a question that will be crucial in determining the future of cryptocurrencies: do people want a currency free from government control or not?

The BIS report proposed a hypothetical cryptocurrency called Fedcoin, which would have one-for-one compatibility with outstanding cash and government reserves. The report proposes that “Fedcoins would only be created (destroyed) if an equivalent amount of cash or reserves were destroyed (created) at the same time. Like cash, Fedcoin would be decentralised in transaction and centralised in supply.” Such a system would offer individuals the convenience of digital payments along with, at least in theory, the anonymity of cash (while economists such as Ken Rogoff believe anonymity is a bad thing, the BIS report provides several “legitimate” reasons why it is desirable).

The report raises several logistical questions. Perhaps most importantly, what does Fedcoin’s blockchain look like? Bitcoin employs a system where miners (anyone willing to provide sufficient computing power) independently verify and store transactions, and are compensated with new bitcoins. Would the Fed cede such operations to “ordinary” individuals or would it somehow operate the system in-house? If the former, how would it compensate these individuals if the supply of Fedcoins is tied to cash and reserves outstanding? If the latter, would anonymity be sacrificed?

Logistical questions aside, let’s imagine a world where consumers and businesses choose between Bitcoin and Fedcoin. Bitcoin supply is determined by a limited algorithm, and is immune to inflating by a government. Fedcoin would have the backing of a government, and presumably guaranteed exchangeability with outstanding cash and reserves. The decision would come down to individuals’ political philosophy and economic worldview. Longstanding debates between the gold standard and fiat money underscore that different people would come to different conclusions. The outcome might also be determined by future events. A financial crisis leading to the collapse of fiat currencies would drive people to private options, while successful attacks by hackers on Bitcoin could do the opposite.

Despite China’s recent moves, I think it far more likely that rather than “banning” cryptocurrencies, most governments will coopt them and offer their own versions. But while the gold-versus-fiat debate is about assembling the political forces necessary to change government policy, the private-versus-public cryptocurrency debate would allow individuals to vote with their actions. Those favoring the private option could use it whenever possible, while those favoring the public option could do the same. Network effects might ultimately force there to be a winner, but the process might well be more democratic than debates we currently have.