State-Sponsored Cryptocurrency: Adapting the best of Bitcoin’s Innovation to the Payments Ecosystem

The “Bitcoin Buzz”
Bitcoin, the most popular virtual currency in the market today,
continues to draw significant buzz. The technology behind the
currency is genuinely revolutionary. It is at the forefront of a
new world for payment systems around the world. However,
despite the excitement and hype surrounding its introduction
to the marketplace, Bitcoin suffers from some significant and
legitimate drawbacks that may permanently limit its adoption
in the mainstream economy. While some see potential for
Bitcoin to form the foundation for a robust and secure
electronic fiat currency, adjustments will need to be made for
the currency to gain widespread usage.
The Marketplace Opportunity for Cryptocurrencies
Bitcoin and other cryptocurrencies face a marketplace that
is ripe for disruption. The payment systems in the U.S. and
the rest of the world are in dire need of overhaul. Many of
today’s payment systems are considered slow, error-prone
and expensive relative to performance in other high-tech
industries. In January, 2015, the Federal Reserve released
a paper1 outlining their goal to “improve the speed and
efficiency of the U.S. payment system from end-to-end over
the next decade.” Desired outcomes include:
1. Speed: A ubiquitous, safe, faster electronic solution(s)
for making a broad variety of business and personal
payments, supported by a flexible and cost-effective
means for payment clearing and settlement groups to
settle their positions rapidly and with finality.
2. Security: U.S payment system security that remains
very strong, with public confidence that remains high,
and protections and incident response that keeps
pace with the rapidly evolving and expanding threat
environment.
3. Efficiency: Greater proportion of payments originated
and received electronically to reduce the average
end-to-end (societal) cost of payment transactions
and enable innovative payment services that deliver
improved value to consumers and businesses.
4. International: Better choices for U.S. consumers and
businesses to send and receive convenient, costeffective,

and timely cross-border payments. 

5. Collaboration: Needed payment system improvements
are collectively identified and embraced by a broad
array of payment participants, with material progress
in implementing them.
Cryptocurrencies are a strong option to help deliver these
outcomes while doing so cheaply and conveniently, but there
are some challenges to overcome first.
Extending the Reach of Cryptocurrencies
Bitcoin suffers from some notable shortcomings inherent
in its design that have constrained its expansion into the
mainstream payments system. Wide-spread adoption will
require Bitcoin to address governmental requirements around
anti-money laundering and illicit trade, as well as other key
concerns such as volatility of value, ease of use challenges,
and a general lack of endorsement by “trusted” bodies.
What would happen if we combined the best attributes of
the technology of cryptocurrencies with the features of an
established fiat currency under the sponsorship of a central
bank? The result very well may just be a new method of
handling payments that would revolutionize the current
system. With the potential to reduce costs, reduce errors,
speed the transfer of money, balance privacy with anonymity,
and do it without the day-to-day operational need for a
centralized organization, whether commercial or federal, the
result could truly be transformational.
Such a system would need to have important roles for banks
and credit unions, support the fundamental banking functions
such as lending and demand deposit accounts, and support
Anti-Money Laundering (AML) / Know Your Customer (KYC)
requirements. It would need to be able to start small and
scale with demand. And it would need to have the full
endorsement of the central bank.

Making It Work
The foundation of a state-sponsored cryptocurrency would be much like Bitcoin - individuals or companies would utilize
computer-generated public “addresses” to send and receive payments. Payers could use an electronic wallet on a

smartphone or computer to send money to the public address of the recipients. Unlike Bitcoin’s current system, however, banks
and other financial institutions , previously approved by the Central Bank, would be the custodians of a shared, distributed
computer-based ledger (called a blockchain in Bitcoin parlance). The currency in this distributed ledger would be existing
fiat currencies (e.g., USD, CAD, Euro, GBP, etc.) rather than a new, unfamiliar digital currency like Bitcoin, and the digital
currency would not necessarily have to supplant paper currency. A crypto-dollar would also need to have the same legal
tender status as paper currency

State-Sponsored Cryptocurrency: Adapting the best of Bitcoin’s Innovation to the Payments Ecosystem