The idea that blockchains could be used to launch a digital fiat currency isn’t new – in fact, it’s already been considered by monetary authorities in countries like England and China.

But as far as applying the concept to the US market, Jim Cunha, senior vice president of treasury and financial services at the Federal Reserve Bank of Boston, believes there are better opportunities for the technology in banking.

“I would not call the central bank’s currency the low-hanging fruit here,” Cunha said, addressing the audience at Business of Blockchain, a conference organized by MIT Technology Review and the MIT Media Lab, yesterday.

Cunha went on to say that while blockchain tech offers potential for efficiency, there are too many technical and legal problems to overcome first, one of those being how to deal with issues of finality, which he referred to as the “holy grail” of financial services.

Cunha told the audience:

“A wire transfer is irrevocable. The Fed would never, ever reverse it. Banks count on that. There is the reason why when you get a mortgage, your lawyer is waiting for the bank to say the wire transfer has been deposited. Because when they sign that piece of paper, which is the deed, that house is yours.”

He pointed to The DAO hard fork as an example of how a blockchain’s decentralized decision making could potentially pose a real issue for banks.

“Just imagine if all the banks got together and said if 51% of you decide to reverse a wire, then we’ll do it,” he said.

Other issues to consider, the Fed official continued, were how a blockchain could impact the trust and risk models of a currency. Because a distributed ledger effectively eliminates the middle person, banks would have to consider a different legal structure.

“This is big, complicated stuff,” he said.

Defining the problem

While a lot of hype surrounds blockchain, Cunha noted that it is not simply a matter of trying to address a solution. First, he said, you have to step back and define the problem.

He told CoinDesk:

“A lot people take a leap that, just because it is a digital currency, it is the next thing beyond paper, because paper is so passé. But what is the problem we are trying to solve?”

In his opinion, the “money supply of the biggest economy in the world” isn’t the right place to start the process.

Instead, Cunha noted on stage, stocks, derivatives and trade agreements are better opportunities for applying blockchain to reduce friction and costs.

No plans for ‘FedCoin’

Cunha also dismissed rumors of a ‘FedCoin’, a theoretical digital fiat currency that sprung out of a paper written by an economist at the Federal Reserve Bank of St Louis in 2015.

“Right now, I can tell you categorically, there is no plan to issue a FedCoin at any specific date or time,” he said.

But Robleh Ali, a research scientist at MIT’s Digital Currency Initiative who formerly worked at the Bank of England, pointed out that different central banks do things differently.

It is perfectly conceivable, Ali said, that technology for a digital fiat currency could evolve outside of the banking system and later be adopted by banks after it had matured and proven itself.

“I think ultimately you will see digital fiat currencies as a foundation for a financial system,” he said, concluding:

“You may be talking  about a 20- or 30-year time horizon for that.”

Image via Amy Castor for CoinDesk