Cryptocurrency volatility undermines its ability to store value: Powell

The Fed prefers to call cryptocurrency or crypto coins “crypto assets” because their volatility undermines their ability to store value, a basic function of a currency, says US Federal Reserve Chair Jerome Powell. He pointed out that the public needs to understand the risks behind Bitcoin and other cryptocurrencies.

In remarks to a virtual summit hosted by the Bank for International Settlements, Powell said they are more of an asset for speculation. “So they are also not particularly in use as a means of payment. It’s essentially a substitute for gold rather than for the dollar.”

On Monday, Bitcoin soared nearly tenfold in value compared with a year ago, hovering around $57,000, up from $5,830 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, as per Aljazeera, is also injecting $120 bn into the banking system each month by purchasing Treasurys and mortgage-backed securities.

Powell said the Fed is researching the potential for a central bank digital currency, but it is not yet near a decision about implementing one. “We are not in a mode of trying to make a decision at this point,” he said. “We are experimenting with technology.”

Given the dollar’s critical role as the world’s leading reserve currency, Powell said the Fed has an obligation to be on the cutting edge of understanding the costs and benefits of a central bank digital currency (CBDC). He said there was no need for the Fed to rush or be first to market. The Fed is conducting research through an in-house technology lab, and also collaborating with MIT through the Federal Reserve Bank of Boston. “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 said.

The Fed chair pointed out the benefits of a more efficient, more inclusive payment system, and the risks as cyberattacks, money laundering and terrorist financing. “There is also the risk that the digital currency could be held by individuals electronically and, as such, bypass banks.”

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He also expressed 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. A good example is Facebook’s Libra, which it now calls Diem. “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 expections,” Powell said.