The Federal Reserve System vs the Blockchain

 

Jonathan M. Hazell

 

Satoshi Nakamoto brought Bitcoin to the world on October 31st, 2008. His white paper introduced the digital currency and its novel Blockchain open source, public ledger. Nakamoto's paper came at an important time in modern finance. The U.S. and really the whole world, were reeling from the economic crash of 2008 just weeks earlier. The Bitcoin paper appears to be a reaction against central banking and the existing monetary system. It provided an alternative financial system that was publicly accessible.

 The prescribed government  remedy to the 2008 Crisis was massive bailouts to financial institutions.  The collusion between "Big Banks" and the federal government was highly publicized. "Too Big to Fail" became part of the public discussion. In the end the Federal Reserve allocated trillions of dollars to different institutions. Congressman Alan Grayson famously questioned both Federal Reserve chairman, Ben Bernanke, and Inspector General, Elizabeth Coleman, on the amounts of actual funding given out to domestic institutions and foreign entities in 2009.

        

http://www.huffingtonpost.com/2009/07/24/bernanke-i-dont-know-whic_n_244302.html,  https://www.youtube.com/watch?v=cJqM2tFOxLQ, In both of these Congressional inquiries, neither the Federal Reserve Chairman or Inspector General could answer questions regarding the Federal Reserve balance sheet and where actual allocations went to following the crisis in 2008. The lack of Federal Reserve oversight helped prompt the "Audit the Fed" Bill in 2009. The bill to allow Congress to audit the Federal Reserve has gone through various degrees of success, but still has not become law.

In 2015, David Andolfatto, the Vice President of the Federal Reserve Bank's (FRB) St. Louis branch extensively commented on Bitcoin and the Blockchain for Coindesk.  

http://www.coindesk.com/federal-reserve-bank-vp-protocol-just-like-bitcoin/,  He compared the digital currency platform to the FRB financial platform. “The way I view the Fed, and any institution, is it’s basically a computer program. Just like bitcoin, it’s an open-source computer program. You ask yourself, ‘What is bitcoin?’ It’s a protocol, it’s a computer program, it’s a constitution, it’s a law, it’s a legal code, it’s basically a constitution that governs the supply of its money and that governs the processing of payments.

As a broad overview this comparison can apply. He later makes specific comparison regarding the payment systems. He relates the similarities between FRB's Fedwire system and the Blockchain. His main point of difference is in regards to the trusted third party system. He states that the FRB ledger system is backed by the Federal Reserve and by extension the U.S. Congress and therefore the government itself. Bitcoin is conducted via miners throughout the world on the Blockchain. It is totally decentralized, which he notes is completely contrary to the FDR system. He then makes the comparison though of the two systems, "Congress is the creator of the Fed, and so there are amendments to the way the fed might operate. As long as this occurs, I see the Fed as an open-source evolving protocol, much like bitcoin.”

The strength of his comparison lies in the connection to U.S. Congress oversight and therefore to the U.S. people themselves. The transactions on the open-sourced Blockchain are posted on computers throughout the world. The actual allocation of Bitcoin itself is limited in number to 21 million units total that will be issued until 2140. On this date the allocation ends. The transparency of the actual numbered units and the ledger itself contrast sharply with the FRB's finance system.  How much money gets allocated? To whom? The actual relationship of the FRB and the U.S. government has historically been difficult to define. It is fair to say, as evident by the trillions of dollars in recent allocations after the 2008 Crisis, that the FRB does not operate in a transparent manner. The FRB appears to have no limitation on funds available and no real time transparent ledger. The FRB standard response is that its system is fully regulated with oversight from the U.S. government. Few citizens and Congress members can testify truthfully to the FRB's transparency today. The FRB's response after the 2008 Crisis and the failure of the Audit the Fed bill illuminated the closed nature of the Federal Reserve.   

http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/#51a504336877,

Bitcoin and the open-source Blockchain were introduced after the 2008 Crisis. The creator of this digital currency and the transparent ledger Blockchain system, Satoshi Nakamoto, ironically is still anonymous to the world. Many banks and governments are working on adapting elements of his open protocol for their systems. Fundamentally the Bitcoin/Blockchain system though is at odds with the central banking/government financial systems that run today's economic system. There are of course technical similarities. It is difficult to see though how the two systems can be integrated given their different philosophical foundations.