Can the Federal Reserve Be as Transparent as Bitcoin Exchanges?

How much gold does the Federal Reserve, and the US, really have? Since the losses incurred at Mt Gox the cryptocurrency community has been especially vigilant at demanding regular audits from exchanges to prove their holdings. Exchanges have commonly passed with surplus assets.

Good examples of this include Kraken who checked in at 100.5% and OkCoin who had a whopping 104.86% of their stated holdings. On occasions such as the drama between Alex Green and Jackson Palmer over how such audits should be carried out at Moolah, there was a significant backlash from the dogecoin community over this exact lack of transparency.

The proof of solvency audit process is much simpler, faster and cost effective when using cryptocurrency compared to traditional currency or financial assets. This is due to cryptocurrency businesses simply needing to provide the addresses that they use. The sum of the cryptocurrency held at these addresses is then compared to the amount the company claims to have. This comparison has also typically been carried out with open source software providing an extra layer to the trustworthiness of the result as the code used to make the audit can be freely analysed.

Let’s compare these recent developments in cryptocurrency with the track record of the United States Bullion Depository (Fort Knox) controlled by the United States Government and watched over by the Federal Reserve.

Fort Knox

Construction was finished on the US bullion depository in 1936 which is supposedly home to 147.3 million ounces of gold according to the United States Mint, approximately 3% of the gold ever refined globally. It has been asserted several times that the gold is regularly inventoried and audited, but information on the specifics of this are rarely made public.

Only two public visits have been made to the vaults by outside “authorised personnel” to provide an unofficial visual inspection of the contents of the vaults:

  • 1943 – Franklin D Roosevelt makes an inspection trip lasting a total of two hours.
  • 1974 – Members of Congress made a special inspection which was covered by selected press.

The secretive nature of the Federal Reserve has lead to a theory on the true status of the gold held at Fort Knox.

Federal Reserve Proof of Reserves?

Following the emergence of forged gold bars filled with tungsten in Asian markets over the last few years it has been theorised that the gold held at Fort Knox has been replaced to some degree by forged tungsten bars in some kind of “inside job”. Tungsten is commonly used for this type of counterfeiting due to its almost identical weight to gold and its non-ferro-magnetic properties. Although the international bullion market is supposedly rife with fraud there is nothing beside a few opinionated claims linking this activity to the Federal Reserve.

Although there is no concrete evidence for this theory, it is not completely impossible that it could have occurred. For example, the US Department of the Treasury website states some facts on the organisation of security personnel deployed at Fort Knox:

The guard force is composed of men selected from various Government agencies, or recruited from Civil Service registers.

Who is in control of this “selection”? It is not impossible that this level of executive control over the depository could lead to corruption.

No visitors are permitted at the Depository. This policy was adopted when the Depository was established, and is strictly enforced.

Beside this being an untrue statement in light of the 1974 congressional inspection and the 1943 Franklin D Roosevelt trip, the only people who could know the integrity of the depository intimately are selected and controlled… Not open like the blockchain enables. Ed Moy, Director of the United States Mint 2006-2011, wrote this about his observations concerning the contents of Fort Knox:

I have seen it with my own eyes. But I am not confirming or denying that I’m part of a conspiracy.

In conclusion, I don’t identify with the Goldfinger-inspired conspiracy theorists. But I do think the US Government and Federal Reserve have an obligation to prove publicly through a completely independently run audit that they are holding the assets say they do. This obligation is to those American citizens that have paid so dearly in their standard of living for the mistakes made by the Federal Reserve. If no such action is taken it will be standing testament to the fact that the transparent financial system found in cryptocurrency can provide much better confidence to consumers then a secretive, centralised and authoritarian financial authority.

Images from Shutterstock.

Last modified: June 10, 2020 5:24 PM UTC

September 21, 2014 11:30 PM UTC
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Samuel Barnes @gravysam

Computer Science Student. Excited for the future of cryptocurrencies.