The Fed chairman warned that bitcoin and other cryptocurrencies are “not really useful as a store of value,” but added that the central bank itself is examining the potential costs and benefits of a digital dollar.
Federal Reserve Chairman Jerome Powell said Monday that the US public needs to understand the risks behind Bitcoin and other cryptocurrencies, even as the central bank itself explores the potential costs and benefits of a digital dollar.
According to Powell, the Fed prefers to call crypto coins “crypto assets” because their volatility undermines their ability to store value, a basic function of a currency.
“They are very volatile, see Bitcoin, and therefore not really useful as a store of value,” Powell said in a comment to a virtual summit hosted by the Bank for International Settlements. “They’re more of an asset for speculation. They are therefore not particularly used as a means of payment. … It is essentially a substitute for gold, not the dollar. “
Bitcoin has increased almost tenfold year over year and stood at around $ 57,000 on Monday. That is up from $ 5,830 in March 2020. This is often viewed as a hedge against inflation, and inflation fears have risen as the Fed kept its short-term policy rate near zero for the past year. The Fed invests $ 120 billion in the banking system every month by buying government bonds and mortgage-backed securities.
While bitcoin is rarely used in transactions, this may change. Electric car maker Tesla said last month it was buying $ 1.5 billion worth of bitcoin and would soon be accepting bitcoin payment for its cars.
Powell also said the Fed is exploring the potential for a central bank digital currency, although he added that the Fed is not anywhere near a decision on implementing such a currency.
“We are currently unable to make a decision,” he said. “We experiment with technology.”
Powell added that given the crucial role of the dollar as the world’s leading reserve currency, the Fed “has a duty to be on the cutting edge” to understand the costs and benefits of a central bank digital currency (CBDC).
At the same time, Powell said there was no need for the Fed to rush or “be first on the market”. Many other central banks are investigating CBDCs, including China, and some observers fear that China is ahead of the US in this regard.
Powell says the Fed does research through an in-house technology lab and works with MIT through the Boston Federal Reserve Bank, one of its 12 regional Fed banks.
“The real threshold question for us is:” Does the public want or need a new digital form of central bank money to complement the already highly efficient, reliable and innovative payment-oriented system? “Powell said.
Digital currencies come with risks and benefits, said the Fed chairman. The benefits include a “more efficient, more inclusive payment system” while the risks include cyberattacks, money laundering and “terrorist financing”.
There is also a risk that a digital currency could be held electronically by individuals and therefore bypass banks.
“We don’t want to compete with banks for funding,” said Powell.
Ultimately, Powell said that Congress would likely have to pass legislation allowing a CBDC before the Fed would create one.
“We wouldn’t go ahead without the support of Congress, and I think that ideally that would be in the form of a permitting bill,” Powell said.
The Fed chairman also raised concerns about so-called “stablecoins,” which are digital currencies tied to the value of government-backed currencies such as dollars and euros. The Facebook Libra, which she now calls Diem, is an example of a stablecoin.
“The potentially swift and widespread adoption of a global stable coin, possibly a global currency driven only by the incentives of a private company, is something that is deserving and receiving the highest regulatory expectations,” said Powell. “Private stablecoins will not be an adequate substitute for a solid monetary system based on central bank money.”
