Fed Chief Warns Public Of Bitcoin, Cryptocurrency Risks

Federal Reserve chair Jerome Powell said that the public needs
to understand the risks behind Bitcoin and other cryptocurrencies,
even as the central bank itself is studying the potential costs and
benefits of a digital dollar.

Powell said 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’re highly volatile, see Bitcoin, and therefore not really
useful as a store of value,” Powell said in remarks to a virtual
summit hosted by the Bank for International Settlements. “They’re
more of an asset for speculation. So they’re also not particularly
in use as a means of payment. … It’s essentially a substitute for
gold rather than for the dollar.”

Bitcoin has soared nearly ten-fold in value compared with a year
ago, hovering around $US57,000 ($73,520) on Monday. That is up from
$US5830 in March 2020. It is often seen as a hedge against
inflation, and inflation fears have risen as the Fed has kept its
short-term benchmark interest rate pegged near zero for the past
year. The Fed is also injecting $US120 billion into the banking
system each month by purchasing Treasurys and mortgage-backed
securities.

While Bitcoin is rarely used in transactions, that could change.
Electric car maker Tesla said last month that it was buying $US1.5
billion of Bitcoin and would soon accept Bitcoin payment for its
cars.

Powell also said the Fed is researching the potential for a
central bank digital currency, though he added that the Fed is not
yet near a decision about implementing one.

“We’re not in a mode of trying to make a decision at this
point,” he said. “We are experimenting with technology.”

But Powell added that given the dollar’s critical role as the
world’s leading reserve currency, the Fed has “an obligation to be
on the cutting edge” of understanding the costs and benefits of a
central bank digital currency, or CBDC.

At the same time, Powell said there was no need for the Fed to
rush or “be first to market.” Many other central banks are
exploring CBDCs, including China’s, and some observers worry China
is ahead of the US.

Powell said the Fed is conducting research through an in-house
technology lab, and also collaborating with MIT through the Federal
Reserve Bank of Boston, one of its 12 regional Fed banks.

“Private stable coins are not going to be an appropriate
substitute for a sound monetary system based in central bank
money.”

US Fed chief Jerome Powell

“The real threshold question for us is, does the public want or
need a new digital form of central bank money to complement what is
already a highly efficient, reliable and innovative payments
oriented system?” Powell asked.

There are risks and benefits to digital currencies, the Fed
chair said. The benefits include a “more efficient, more inclusive
payment system,” while the risks involve cyber attacks, money
laundering and terrorist financing.

There is also the risk that a digital currency could be held by
individuals electronically and could therefore bypass banks.

“We don’t want to compete with banks for funding,” Powell
said.

Ultimately, Powell said that Congress would likely need to pass
legislation allowing a CBDC before the Fed would create one.

“We would not proceed with this without support from Congress,
and I think that would ideally come in the form of an authorising
law,” Powell said.

The Fed chair also expressed some concerns about so-called
“stablecoins,” which are digital currencies that are pegged to the
value of government-backed currencies such as the dollar or euro.
Facebook’s Libra, which it now calls Diem, is an example of a
stablecoin.

“The potentially fast and wide adoption of a global stablecoin,
potentially a global currency governed only by the incentives of a
private company, is something that will deserve and will receive
the highest level of regulatory expectations,” Powell said.
“Private stable coins are not going to be an appropriate substitute
for a sound monetary system based in central bank money.”

AP

Federal Reserve chair Jerome Powell said that the public needs
to understand the risks behind Bitcoin and other cryptocurrencies,
even as the central bank itself is studying the potential costs and
benefits of a digital dollar.

Powell said 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’re highly volatile, see Bitcoin, and therefore not really
useful as a store of value,” Powell said in remarks to a virtual
summit hosted by the Bank for International Settlements. “They’re
more of an asset for speculation. So they’re also not particularly
in use as a means of payment. … It’s essentially a substitute for
gold rather than for the dollar.”

Bitcoin has soared nearly ten-fold in value compared with a year
ago, hovering around $US57,000 ($73,520) on Monday. That is up from
$US5830 in March 2020. It is often seen as a hedge against
inflation, and inflation fears have risen as the Fed has kept its
short-term benchmark interest rate pegged near zero for the past
year. The Fed is also injecting $US120 billion into the banking
system each month by purchasing Treasurys and mortgage-backed
securities.

While Bitcoin is rarely used in transactions, that could change.
Electric car maker Tesla said last month that it was buying $US1.5
billion of Bitcoin and would soon accept Bitcoin payment for its
cars.

Powell also said the Fed is researching the potential for a
central bank digital currency, though he added that the Fed is not
yet near a decision about implementing one.

“We’re not in a mode of trying to make a decision at this
point,” he said. “We are experimenting with technology.”

But Powell added that given the dollar’s critical role as the
world’s leading reserve currency, the Fed has “an obligation to be
on the cutting edge” of understanding the costs and benefits of a
central bank digital currency, or CBDC.

At the same time, Powell said there was no need for the Fed to
rush or “be first to market.” Many other central banks are
exploring CBDCs, including China’s, and some observers worry China
is ahead of the US.

Powell said the Fed is conducting research through an in-house
technology lab, and also collaborating with MIT through the Federal
Reserve Bank of Boston, one of its 12 regional Fed banks.

“Private stable coins are not going to be an appropriate
substitute for a sound monetary system based in central bank
money.”

US Fed chief Jerome Powell

“The real threshold question for us is, does the public want or
need a new digital form of central bank money to complement what is
already a highly efficient, reliable and innovative payments
oriented system?” Powell asked.

There are risks and benefits to digital currencies, the Fed
chair said. The benefits include a “more efficient, more inclusive
payment system,” while the risks involve cyber attacks, money
laundering and terrorist financing.

There is also the risk that a digital currency could be held by
individuals electronically and could therefore bypass banks.

“We don’t want to compete with banks for funding,” Powell
said.

Ultimately, Powell said that Congress would likely need to pass
legislation allowing a CBDC before the Fed would create one.

“We would not proceed with this without support from Congress,
and I think that would ideally come in the form of an authorising
law,” Powell said.

The Fed chair also expressed some concerns about so-called
“stablecoins,” which are digital currencies that are pegged to the
value of government-backed currencies such as the dollar or euro.
Facebook’s Libra, which it now calls Diem, is an example of a
stablecoin.

“The potentially fast and wide adoption of a global stablecoin,
potentially a global currency governed only by the incentives of a
private company, is something that will deserve and will receive
the highest level of regulatory expectations,” Powell said.
“Private stable coins are not going to be an appropriate substitute
for a sound monetary system based in central bank money.”

AP