The Federal Reserve has been giving cryptocurrencies and their potential impact on the economy a great deal of thought lately.
Most recently, Fed Governor Lael Brainard provided a rare tilt of the Fed’s hand on digital currencies, taking more time, offering more details than usual and demonstrating the resources that the agency has dedicated to understanding this market.
Speaking at a Fed conference in San Francisco, Brainard is quoted in Reuters as having said:
“Cryptocurrencies are strikingly innovative but also pose challenges associated with speculative dynamics, investor and consumer protections, and money-laundering risks.”
Earlier this week, James Bullard, St. Louis Federal Reserve Bank President, showed up at the Consensus 2018 conference in New York. Policymakers may have been slow to engage with the cryptocurrency market, but as the market has ballooned they appear to be increasingly trying to get out in front of it as much as possible.
Risk vs. Reward
For the Fed, the risks clearly outweigh the rewards, the latter of which Brainard described as the blockchain being used to streamline payments, trillions of dollars in bank-to-bank transactions and limited payment applications.
The risks, which have been well-rehearsed, include the propensity for digital currencies, particularly those with more anonymous features, to be used in fraud given the lack of centralized control and the vulnerable position that consumers and investors alike can be placed in as a result. She also echoed the tone of other policymakers when she said that digital currencies, while “problematic”, aren’t a big enough part of the global economy to risk destabilizing it.
Brainard also nearly placed a nail in the coffin for the possibility of a “Fedcoin,” something market participants were increasingly speculating about given signs like her peer Bullard’s attendance at the blockchain conference.
But despite the fact that the Federal Reserve appears committed to keeping its pulse on the cryptocurrency market, Brainard nixed the idea of the agency joining it. There probably isn’t any love lost between the cryptocurrency community, the technology for which is designed to bypass centralized authorities, and the Fed.
“There is no compelling demonstrated need for a Fed-issued digital currency,” she said.
Former Fed Governor Kevin Warsh sees things differently. If he were a policymaker today, he would dedicate a team to exploring the benefits of a Fedcoin that would supplement, not “supplant” fiat money, according to The New York Times.
Warsh could envision a Fedcoin that would usher in “legal activities into a digital coin.” Warsh’s forward thinking, however, isn’t evident in the current Fed regime.
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Last modified: March 4, 2021 5:07 PM