St. Louis Fed Sees Future in Crypto As Important Asset Class, Bitcoin As Digital Gold

St. Louis Federal Reserve publishes a paper on crypto and Blockchain, touting the importance of Bitcoin as a future asset class.

The Federal Reserve Bank of St. Louis has published a paper entitled “A Short Introduction to the World of Cryptocurrencies” with an overall favorable assessment of digital currency and Blockchain applications for the future.

The paper, written by Aleksander Berentsen and Fabian Schär, begins with a humorous comparison of the Bitcoin (BTC) system to the island of Yap. The small island population had to keep a virtual ledger of who owned what currency, because their units of value were large, almost unmoveable stones that would remain in one place, regardless of ownership, and could be lost at sea.

The researchers then go into technical detail of the mechanisms of Bitcoin mining, the mathematics behind hashing, and how the transaction consensus works, touting the usefulness of Bitcoin as an asset of the future:

“It is likely that cryptoassets such as Bitcoin will emerge as their own asset class and thus have the potential to develop into an interesting investment and diversification instrument. Bitcoin itself could over time assume a similar role as gold.”

The paper then forecasts the areas in which Blockchain technology will have the most effective applications, citing “colored coins”, a kind of meta-transaction linked to a BTC transaction, smart contracts, an application in which Ethereum currently leads, and data integrity.

The negatives of Blockchain technology applications, according to the researchers, are the potential for forks, the energy waste involved with mining, and the price volatility of a non-centralized currency.

The paper’s conclusion again highlights the potential for a new digital currency asset class:

“As an asset, however, Bitcoin and alternative blockchain-based tokens should not be neglected. The innovation makes it possible to represent digital property without the need for a central authority. This can lead to the creation of a new asset class that can mature into a valuable portfolio diversification instrument.”

In January 2017, Federal Reserve chair Janet Yellen spoke favorably of the possibility of the Fed using blockchain and the potential for easier global financial transactions, but offered no specifics as to how this could be implemented.