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Watchers of the crypto space were beside themselves with the recent news that the U.S. Federal Reserve is apparently considering a digital currency. "Every major central bank is currently taking a deep look" at cryptocurrencies, Fed Chairman Jerome Powell said during a congressional hearing on February 11. "I think it's very much incumbent on us and other central banks to understand the costs and benefits and trade-offs associated with a possible digital currency."

The news drove Google searches for the best-known cryptocurrency, Bitcoin, up by 33 percent, and its price surged past $10,000 for the first time in months. Many are suggesting this is the moment crypto comes off the margins to take up its promised role as a mainstream framework for the future of finance. But a closer parsing of the Fed chair's words suggests we should be skeptical.

Powell's mention of cryptocurrency is tantalizing. But it actually represents more of an evolution than a revolution. The central bank is mostly interested in eliminating inefficiencies and increasing visibility into global finance by, effectively, digitizing the dollar. This may well represent a technological leap, but it isn't the same as a federal cryptocurrency, for one obvious reason: It would still be completely controlled by the Fed.

Blockchain-powered currencies such as Bitcoin and the industry's No. 2, Ethereum, are meant to run without central control. This poses real challenges, and the government's apparent interest in crypto is a reminder of the potential pitfalls and false starts the technology faces on the road to broad adoption. Look no further than the bumpy introduction of Facebook's Libra cryptocurrency, which has drawn a fierce backlash from legislators, bankers and even blockchain enthusiasts themselves.

Interestingly, these parties all share the same fear: that Facebook will use Libra to try to create a parallel economy that the company controls. The crypto community has little faith in centralized systems generallyand especially one run by Mark Zuckerberg. The U.S. government also seems reticent to accede to a financial system run by a private corporation or anyone besides itself. What's revealed here is that central banks like the Fed and the crypto community may be more natural allies than first impressions would suggest. But they must traverse a mutual learning curve before they can truly act in a shared interest. One of the first obstacles is understanding what crypto really is.

The fact is, cryptocurrencies are more than just digitized money. They represent an effort to reshape information and financial systems to make them more secure, more transparent and more trustworthy. They are decentralized and self-perpetuating, governed not by powerful individuals or central entities but by market-oriented incentive structures that are written into their DNA.

The scale of the change is as great as the shift from precious metals to paper money or the invention of credit. The blockchain platforms that undergird cryptocurrencies offer a possible future in which finance is no longer opaque and subject to the judgments of middlemen, but is transparent and accessible to everyone. It is no coincidence that so many of the earliest footholds for decentralized finance are in countries, largely in the global South, where governments have mismanaged economies and large segments of the population lack access to basic financial infrastructure such as banks.

Blockchain and cryptocurrency have already started reshaping our financial and information systems in fundamental ways, but most of these projects don't make headlines on a daily basis. As we continue moving past the industry's collective "trough of disillusionment" brought on by 2017's crypto bubble and subsequent burst, the most exciting crypto projects are still operating largely below the radar. That won't last forever. In just the past several months, my colleagues and I have seen many innovative projects move from design to production, promising to reshape aspects of our digital lives from finance to social media to the Internet itself. This momentum is only likely to continue.

The Federal Reserve and other central banks and regulatory regimes around the world must and will play a crucial role in all this. Someday, national currencies may indeed be superseded by decentralized successors. But it isn't going to happen this year.

What is happening now is the rapid blossoming of blockchain and crypto solutions. In a short period of timeyears, not decadesthese types of projects will begin to rewire our global information channels, finance networks, supply chains and more. Central banks will get to see for themselves just how much benefit distributed ledger technology can have if properly implemented. And in their own time, I believe they will integrate the best of these technologies into their own operations. That really is cause to celebrate.

Sean Medcalf is a co-founder and managing partner of Angle42, a company that provides communications and strategic support to businesses in blockchain and other emerging technologies.

The views expressed in this article are the writer's own.

Read more from the original source:
The Fed's Cryptocurrency Head Fake | Opinion - Newsweek