EDITOR NOTE: In a recent BIS-sponsored webinar, Fed chief Jerome Powell made a very curious and telling statement. He said that crypto assets like Bitcoin “are highly volatile...and therefore not really useful as a store of value.” He follows by saying that crypto assets are "essentially a substitute for gold." But how can an asset that is a poor “store of value” substitute for another whose most significant attribute is that of an exceptional store of monetary value? Additionally, a major flaw in nearly all crypto assets, according to Powell, is that “they're not backed by anything.” So, what does the dollar have specifically in terms of “backing” that makes it any different from crypto assets, besides legislative recognition and enforcement? When it comes to defining value, the Fed can’t seem to refer to anything beyond the hand of government. This is because the idea of “intrinsic value” no longer plays a role in current monetary thinking. Yet 5,000 years of history has shown that intrinsic value trumps all legislative attempts to undermine it. Gold has never lost a war against “paper.” And although digital bytes may soon disrupt the operational function of paper, and though it may win in the battle of convenience and transmission, there’s still much more to “real” monetary value than just operational efficiency and coercive legislation.
Work on central bank's digital dollar continues but there is no rush, Fed chairman says
Bitcoin is lacking key ingredients that would make it a useful currency. As a result, the crypto currency is essentially more of a substitute for gold than the dollar, Fed Chairman Jerome Powell said Monday.
"Crypto assets are highly volatile -- see Bitcoin -- and therefore not really useful as a store of value. They're not backed by anything. They're more of an asset for speculation," Powell said, during a webinar sponsored by the Bank of International Settlements.
"It is essentially a substitute for gold rather than the dollar," he added.
Stable coins are "an improvement" over crypto assets, but their credibility comes from being backed by a sovereign currency, he said.
"Stable coins may have a role to play with appropriate regulation, but that role will not be to form the basis of a new global monetary system," he said.
"A global currency governed by the incentives of a private company is something that will deserve and will receive the highest level of regulatory expectations," the Fed chairman said.
One day in the future, the Fed might develop a digital dollar, Powell said, but not until after a lot of careful review and acceptance by the American public and government.
It would be better for Congress to pass laws specifically authorizing the digital currency rather than for the Fed to use existing authority, he said.
Some economists argue that a digital dollar would have been useful in the recent efforts to stimulate the economy during the pandemic. Theoretically, digital dollars could instantaneously be sent out to Americans.
As he has in the past, Powell stressed the Fed is in "go-slow" mode about such ground-breaking technology.
While work is going on exploring the ramifications of a digital dollar, Powell stressed that no decision is looming.
"Because we're the world's principle reserve currency, we don't need to rush this project -- we don't to be first to market," Powell said.
One concern Powell mentioned is that Americans would want to hold digital dollars during any crisis, leading to potential bank runs out of paper currency.
"There is just a tremendous amount of thinking going on, on how we can capture the potential benefits while also managing those potential risks," Powell said.
Originally posted on Morning Star