Can a Central Bank Use Cryptocurrency?

This special report from the J.P. Morgan Global Research team, which can also be found on J.P. Morgan Markets, explores some of the key considerations for central banks in adopting cryptocurrency.

With just over 1,500 cryptocurrencies approaching a market cap of over $451B1 as of March 1, virtual currencies continue to remain appealing to not only market participants, but also to regulators. The J.P. Morgan Global Research team explores some of the key considerations that central banks would likely encounter if they issued their own cryptocurrencies and how the Fed’s involvement with distributed ledger technologies (DLT) could look.

The economic issues raised by cryptocurrencies mainly relate to how they will interact with existing monetary regimes and the central banks that administer them.

The first question is whether cryptocurrencies can become legitimate competitors to existing national currencies.

The second question is whether central banks will co-opt distributed ledger technology to create their own central bank-issued cryptocurrencies.

Due to the anonymity of cryptocurrency transactions and the heightened volatility around technology and regulation, cryptocurrencies, in their current state, generally do not function as money under economists’ definition of money, which is: (i) a unit of account, (ii) a medium of exchange, or (iii) a store of value. The fundamental problem seems to be that the supply of cryptocurrencies is not nimbly adjusted to offset fluctuations in demand. As a result, the values of cryptocurrencies tend to fluctuate massively, frustrating any attempt to price and transact in them. Because of this, existing cryptocurrencies are unlikely to compete with established conventional currencies.

From Sweden’s Riksbank studying the issuance of a so-called “e-krona” to the Bank of Canada experimenting with a peer-to-peer system known as Project Jasper (CADcoin), it is evident that traditional banks are exploring the practicalities of issuing central bank cryptocurrencies (CBCC). Unlike existing cryptocurrencies, a potential CBCC would be issued and backed by central banks and would trade 1:1 with the traditional currency, thus having a more stable value than existing cryptocurrencies. Virtually every central bank around the world today is an institution in the service of the public. There must be a compelling policy rationale to issue CBCCs. One such rationale is to keep up with the times: payment systems are increasingly cashless, and it would seem natural that central bank-provided payment services move in that direction.

Despite the early stage of cryptocurrency adoption, the Federal Reserve System has mused the possibility of “Fedcoin” for the U.S. Below are some considerations involved in creating a CBCC.


A potential CBCC would become a third form of monetary base, alongside currency and reserves. Just as a dollar of currency trades 1:1 with a dollar of reserves, so too would a dollar of Fedcoin trade 1:1 with either of the other two dollar forms. Bank reserves arguably are a form of electronic cash, like Bitcoin; reserves still differ from Fedcoin in two respects. First, only a limited number of entities are allowed to hold reserves. Second, reserve payments are settled by a trusted third party, the Fed, rather than on a peer-to-peer basis.


The Fed’s interaction with businesses and households is generally mediated through the banking sector. If issued, Fedcoin would provide businesses and individuals with direct access to this claim on the Fed’s balance sheet. This structure could potentially create a strong incentive to shift transaction deposits from the commercial banking system to Fedcoin: claims on the Fed balance are arguably even safer than FDIC-insured claims. If Fedcoin paid interest, as is currently the case with reserves, this incentive would be even stronger. If this migration from deposits to Fedcoin were to occur, the Fed effectively would be using its balance sheet to create a “narrow bank.” The vast restructure and move toward such a system would be quite disruptive to the financial sector, in our view.


Another consideration when constructing Fedcoin is whether it should share one important attribute of both Bitcoin and cash: anonymity. This is in contrast to the other principal means of payment available to individuals—bank deposits—where the government requires banks to know their clients. In theory, Fedcoin could be structured to preserve anonymity, but should it? On the one hand, privacy has come to be seen as an implicit constitutional right, and that may extend to monetary transactions. On the other hand, there are several laws intended to prevent the financial system from being used to launder money or to finance terrorism and other activities.

While Fedcoin remains a distant reality, the U.S. payment system could potentially benefit from distributed ledger and other financial technologies. As a key stakeholder, the Fed will remain involved in an ongoing way with cryptocurrency and has actively encouraged private sector participants to consider ways in which the U.S. can catch up in delivering faster payments.

In its current state, cryptocurrencies have not attained relative stability to become legitimate competitors to existing currencies, although several developed central banks have expressed interest in issuing their own cryptocurrencies and have begun studying this notion. Aside from central banks deciding whether to use DLT to create their own central bank-issued currency, they will also need to consider various design factors that touch on public policy areas that are broader than merely monetary policy.

1 Source: CoinMarketCap Note: As of 3/1/2018

Learn More

View report on J.P. Morgan Markets

This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures.

JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.

This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.


Copyright © 2018 JPMorgan Chase & Co. All rights reserved.