The lines between cryptos — notably the marquee name, bitcoin — and central bank efforts on their own digital currency offerings have been drawn a bit more brightly than before.
Earlier this week, Fed Chairman Jerome Powell made remarks that seemed to place cryptocurrencies — the type not pegged to an underlying asset, or to fiat — squarely in the space of speculative instrument, not as conduits of commerce.
“They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything,” Powell said during a virtual panel discussion on digital banking hosted by the Bank for International Settlements and as reported by CNBC. “It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar.”
Then there’s the issue of the digital dollar, of course, part of a global trend where central banks have been seeking the ways and means of bringing central bank digital currencies (CBDCs) to retail and wholesale payments. As has been widely reported, the Fed is mulling what it would take to bring a digital form of greenback to users in the not-too-distant future.
Bloomberg reports that a joint project between the Federal Reserve Bank of Boston and MIT will report their research findings regarding a digital dollar platform as soon as July.
In an interview with Karen Webster, Jim Cunha, senior vice president, secure payments and FinTech at the Federal Reserve Bank of Boston, said the joint efforts between the Fed and MIT are focused on exploring the infrastructure that would underpin a CBDC.
According to Cunha, “This is about experimenting for the purposes of educating ourselves, and making sure that we really understand what the fundamental technology can do. It’s not about going to production.”
At a high level, most CBDCs can be issued in an environment where each country can “go it alone,” said Cunha, confining the digital coins to domestic use in a bid to (partially or completely) dislodge cash from its entrenched place within commerce.
But bitcoin, it should be noted, is not being viewed by some high-level officials with the same embrace.
Treasury Secretary Janet Yellen echoed Powell’s sentiments in an interview with CNBC last month. “I don’t think that bitcoin … is widely used as a transaction mechanism,” she said. “To the extent it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering,” she added, referring to the amount of electricity used in processing the complex transactions involved in a blockchain-based currency.
Yellen, however, had made the distinction that a federally backed digital currency could have its place within financial services. That type of currency, she said last month, “could result in faster, safer and cheaper payments, which I think are important goals.”
Goals are one thing, timeframe another. As the saying goes, slow and steady wins the race. At least some stakeholders are urging caution on the development and deployment of a digital dollar. As noted earlier this week, the American Banking Association (ABA) has pointed to some concerns:
“Rushing anything of this potential magnitude could introduce unintended consequences that threaten the stability of the banking system without contributing meaningfully to economic inclusion,” said Steve Kenneally, senior vice president of payments at the ABA, as reported by Bloomberg.
Yet Ed Wilson, a financial regulation expert and partner at Venable LLC, told Webster last week that instead of fighting crypto, the banks and credit card processors would do well to figure out how to move away from a business model that makes a significant portion of profits from issuing to credit cards to one that monetizes the account-to-account relationships inherent in a crypto-based system.
The road, though, may be a lengthy one.
“To move forward on this, we would need buy-in from Congress, from the administration, from broad elements of the public, and we haven’t really begun the job of that public engagement,” Powell said in his remarks this week. “So you can expect us to move with great care and transparency with regard to developing a central bank digital currency.”
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