The chairman of the US Federal Reserve cautioned that Bitcoin and other cryptocurrencies were “ not really useful as a store of value, ” but added that the central bank itself is studying the potential costs and benefits of a digital dollar.
Federal Reserve Chairman Jerome Powell said Monday that the United States 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 cryptocurrencies “crypto assets” because their volatility undermines their ability to store value, a basic function of a currency.
“They are very volatile, they see Bitcoin, and therefore they are not really useful as a store of value,” Powell told a virtual summit hosted by the Bank for International Settlements. “They are more of an asset for speculation. Therefore, they are also not used especially as a means of payment. … It is essentially a substitute for gold instead of the dollar. “
Bitcoin has skyrocketed nearly ten times in value compared to a year ago, hovering around $ 57,000 on Monday. That’s up from $ 5,830 in March 2020. It’s often seen as a hedge against inflation, and inflation fears have increased as the Fed has kept its short-term benchmark interest rate close to zero for the year. last. The Fed is also pumping $ 120 billion into the banking system each month by buying Treasuries 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 $ 1.5 billion worth of Bitcoin and would soon accept Bitcoin payment for its cars.
Powell also said the Fed is investigating the potential for a central bank digital currency, though he added that the Fed is not yet close to making a decision on implementing one.
“We are not in a mode of trying to make a decision at this point,” he said. “We are experimenting with the 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 at the forefront” in understanding the costs and benefits of a central bank digital currency, or CBDC.
At the same time, Powell said there is no need for the Fed to rush or “be the first to market.” Many other central banks are exploring CBDCs, including China’s, and some observers fear that China is ahead of the United States on this front.
Powell said the Fed is conducting an investigation through an in-house technology lab and is also collaborating with MIT through the Federal Reserve Bank of Boston, one of its 12 regional Fed banks.
“The real initial 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?'” Powell said.
There are risks and benefits to digital currencies, the Fed chairman said. The benefits include a “more efficient and inclusive payment system,” while the risks involve cyberattacks, money laundering and financing of “terrorism.”
There is also the risk that a digital currency is in the hands of individuals electronically and therefore may bypass banks.
“We don’t want to compete with the banks for funding,” Powell said.
Ultimately, Powell said Congress would likely need to pass legislation allowing a CBDC before the Fed creates one.
“We would not proceed with this without the support of Congress, and I think ideally it would come in the form of an authorization bill,” Powell said.
The Fed chairman also expressed some concerns about so-called “stablecoins,” which are digital currencies pegged to the value of government-backed currencies, such as the dollar or the euro. Facebook’s Libra, which he now calls Diem, is an example of a stablecoin.
“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,” Powell said. “Private stablecoins are not going to be an appropriate substitute for a sound monetary system based on central bank money.”