The chairman of the U.S. Federal Reserve warned that Bitcoin and other cryptocurrencies “were not really useful as a store of value”, but added that the central bank itself is studying the possible costs and benefits of a digital dollar.
Federal Reserve Chairman Jerome Powell said on Monday that the United States public needs to understand the risks behind Bitcoin and other cryptocurrencies, although the central bank itself is studying the potential costs and benefits of a digital dollar.
Powell said the Fed prefers to call crypto currencies “crypto assets” because their volatility undermines their ability to store value, a basic function of a currency.
“They are highly volatile, see Bitcoin, and therefore are not really useful as a store of value,” Powell said in comments at a virtual summit organized by the Bank for International Settlements. “They are yet another asset for speculation. Therefore, they are also not particularly used as a means of payment. … It is essentially a substitute for gold, not for the dollar. “
Bitcoin’s value has increased almost tenfold compared to the previous year, hovering around $ 57,000 on Monday. This is more than $ 5,830 in March 2020. It is often seen as a hedge against inflation, and inflation fears have escalated as the Fed kept its short-term basic interest rate pegged to zero last year. The Fed is also injecting $ 120 billion into the banking system each month, through the purchase of Treasury bills and mortgage-backed bonds.
Although Bitcoin is rarely used in transactions, that can change. Electric car maker Tesla said last month that it was buying $ 1.5 billion in Bitcoin and would soon accept Bitcoin payment for its cars.
Powell also said that the Fed is researching the potential for a central bank’s digital currency, although he added that the Fed is not yet close to a decision on whether to implement one.
“We are not in a position to try to make a decision right now,” he said. “We are experimenting with technology.”
But Powell added that, given the critical role of the dollar as the world’s leading reserve currency, the Fed has “an obligation to be at the forefront” of understanding the costs and benefits of a central bank’s digital currency, or CBDC.
At the same time, Powell said there was no need for the Fed to rush or “be the first to trade”. Many other central banks are exploring CBDCs, including that of China, and some observers fear that China will be ahead of the United States on that front.
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.
“The real limit 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 payment-oriented system?’” Said Powell.
There are risks and benefits to digital currencies, said the Fed chairman. The benefits include a “more efficient and inclusive payment system”, while the risks involve cyber attacks, money laundering and “terrorist” financing.
There is also a risk that a digital currency may be held electronically by individuals and therefore bypass banks.
“We don’t want to compete with banks for financing,” said Powell.
Ultimately, Powell said that Congress would probably need to pass legislation allowing a CBDC before the Fed created one.
“We would not proceed with this without Congressional support, and I think the ideal would be for it to take place in the form of an authorizing law,” said Powell.
The Fed chairman also expressed some concerns about so-called “stablecoins”, which are digital currencies indexed to the value of government-supported currencies, such as the dollar or the euro. Facebook’s pound, which it now calls the Diem, is an example of a stable currency.
“The potentially rapid and widespread adoption of a global stablecoin, potentially a global currency governed only by the incentives of a private company, is something that will deserve and receive the highest level of regulatory expectations,” said Powell. “Private Stablecoins will not be an appropriate substitute for a solid monetary system based on the central bank’s currency.”