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Federal Reserve Governor: We’re Monitoring ‘Extreme Volatility’ of Cryptocurrencies

Last Updated March 4, 2021 5:06 PM
Samantha Chang
Last Updated March 4, 2021 5:06 PM

Federal Reserve Governor Lael Brainard said the central bank is monitoring the “extreme volatility” of cryptocurrency prices, particularly bitcoin, but does not believe virtual currencies pose a current threat to U.S. financial stability.

Brainard made the remarks April 3 during a speech  at the Stern School of Business in New York, where she warned investors to be cautious about “highly speculative” asset classes such as cryptocurrencies, and said the Fed will continue to study them.

“One area that the Federal Reserve is monitoring is the extreme volatility evidenced by some cryptocurrencies,” Brainard noted. “For instance, Bitcoin rose over 1,000 percent in 2017 and has fallen sharply in recent months. These markets may raise important investor and consumer protection issues, and some appear especially vulnerable to money-laundering concerns.”

Brainard continued: “As in other highly speculative markets, individual investors should be careful to understand the possible pitfalls of these investments and the potential for losses. But it is less clear how the valuations of cryptocurrencies currently could pose a threat to financial stability. Nonetheless, we will continue to study them.”

Separately, Brainard said the risks associated with the banking sector and with traditional asset classes such as stocks and bonds are “moderate” by historical standards due to the reforms instituted since the 2008 financial crisis.

“Credit growth is robust, and banks are registering strong profitability relative to their international peers,” she said.

Fed Chairman Powell: ‘Nothing Against Bitcoin’

Lael Brainard’s stance on cryptocurrencies echoed the sentiments of her boss, Federal Reserve chairman Jerome Powell, who urged caution, but is not an avowed bitcoin bear, CNBC  reported.

“[I have] nothing against bitcoin,” Powell said in November 2017. “We generally look at some of the risks of cryptocurrencies associated with money-laundering and those sorts of issues, but we’re not broadly opposed or supportive of alternative currencies.”

The latest Federal Reserve comments come on the heels of several weeks of wild price swings for bitcoin and other digital currencies. During the past four weeks, the bitcoin price has plunged more than $4,500, and BTC has posted its worst first-quarter performance since it launched in 2009.

bitcoin price chart

The bitcoin price hovered at $11,400 on March 5 and has since nosedived to about $6,882 today.

While the erratic price fluctuations have alarmed some investors, crypto evangelists remain bullish, saying the market’s recent collapse is temporary and merely the result of heightened regulatory scrutiny in large markets like South Korea.

Ex-Skype COO: BTC Could Soar to $1 Million

“Regulators seem open-minded and are now working to eliminate the risks for consumers,” Michael Jackson, the former COO of Skype, told the Independent . “So I see no reason why bitcoin shouldn’t fulfill its dream. And if it does, then recent price falls will appear trivial.”

Jackson, who is an adviser to bitcoin wallet provider Blockchain, previously said bitcoin prices could skyrocket to $1 million because he believes its value as a payment mechanism and store of value is undeniable.

“At its core, it is still an international payment mechanism and a store of value that doesn’t change with speculation,” Jackson told Newsweek  in December 2017. “Bitcoin’s upper limit is still much more than it is today. If it reaches even one percent of the value store of other major money supplies, like the U.S. dollar, it could be worth 100 times what it is today.”

Featured image from Shutterstock.