Head of US central bank warns about risks of Bitcoin
The chief of the Federal Reserve, the central bank of the United States, said Monday that the U.S. public needs to understand the risks behind Bitcoin and other cryptocurrencies.
Jerome Powell said the Fed prefers to call crypto coins “crypto assets,” because their volatility undermines their ability to store value, a basic function of a currency.
“They’re highly volatile, see Bitcoin, and therefore not really useful as a store of value,” Powell said in remarks to a virtual summit hosted by the Bank for International Settlements. “They’re more of an asset for speculation. So they’re also not particularly in use as a means of payment. ... It’s essentially a substitute for gold rather than for the dollar.”
Bitcoin has soared nearly ten-fold in value compared with a year ago, hovering around $57,000 on Monday. That is 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 is also injecting $120 billion into the banking system each month by purchasing Treasurys and mortgage-backed securities.
While Bitcoin is rarely used in transactions, that could change. U.S. electric car maker Tesla said Wednesday that customers can now buy its electric vehicles with bitcoin.
“You can now buy a Tesla with bitcoin,” Tesla boss Elon Musk said on Twitter, adding that the option would be available outside the United States later this year.
Powell also said the Fed is researching the potential for a central bank digital currency, though he added that the Fed is not yet near a decision about implementing one.
“We’re not in a mode of trying to make a decision at this point,” he said. “We are experimenting with technology.”
But Powell added that given the dollar's critical role as the world's leading reserve currency, the Fed has “an obligation to be on the cutting edge” of understanding the costs and benefits of a central bank digital currency, or CBDC.
At the same time, Powell said there was no need for the Fed to rush or “be first to market.” Many other central banks are exploring CBDCs, including China's, and some observers worry China is ahead of the U.S.
Powell said the Fed is conducting research through an in-house technology lab, and also collaborating with MIT through the Federal Reserve Bank of Boston, one of its 12 regional Fed banks.
There are risks and benefits to digital currencies, the Fed chair said. The benefits include a “more efficient, more inclusive payment system,” while the risks involve cyber attacks, money laundering and terrorist financing.
There is also the risk that a digital currency could be held by individuals electronically and could therefore bypass banks.