By JP Schnapper-Casteras and Misha Guttentag
The onset of the “crypto winter” has rekindled a fierce debate about the role of bitcoin and digital assets in monetary policy: opponents lambast them as a Ponzi scheme about-to-collapse and proponents promise they will replace government currencies entirely. The reality is that, at least in the short term, both extremes are highly unlikely, and that central bankers are already quietly charting a course in between that recognizes that some form of digital money is here to stay. Notably absent from many of these discussions, however, is the biggest Central Bank in the world: the U.S. Federal Reserve.
After a year when bitcoin’s price dropped over 75%, this might seem to be a counterintuitive moment for these conversations — but they are already subtly starting. Just recently, the Governor of the Bank of England, Mark Carney, expressed a remarkable openness towards digital money. “It is still early days for cryptoassets,” Carney explained, and despite their present shortcomings, they are “throwing down the gauntlet to the existing payment systems” to improve services. Last month too, the Managing Director of the International Monetary Fund, Christine Lagarde, made the case for central banks to explore, adopt, and issue digital currencies, because a “new wind is blowing” “and we are all in the process of adapting.”
Carney and Lagarde’s middle-ground approach stands in stark contrast with caustic criticism from some of their colleagues: two days after her speech, a member of the European Central Bank vilified bitcoin as “evil spawn of the financial crisis” and previously, an official at the Bank for International Settlements deplored it as “a combination of a bubble, a Ponzi scheme and an environmental disaster.”
Such categorical dismissals are belied by the growing recognition that digital money like bitcoin may offer a variety of advantages, including in terms of security, transferability, transparency, and inflation resistance. As Lagarde suggested, central banks could choose to issue their own digital currencies that compete with bitcoin in terms of monetary policy, payment privacy, or other features.
Although it may appear premature to imagine central banks managing a digital money alongside traditional reserve assets, the possibility is real enough for central banks to take it seriously, and a number are. A major new survey reported that some 70% of central banks are engaged in work around digital currencies, and half have moved onto “hands on” proof-of-concept activities and other research.
For example, the Bank of Canada also discretely published a research paper examining how central banks might operate under a “bitcoin standard” similar to the gold standard of the late 19th century. The paper explained that a bitcoin standard would not mean the end of government money or central banks — but that backing national currencies with bitcoin reserves could offer several major benefits over current international monetary standards, due to the stability presented by bitcoin’s algorithmically-fixed inflation rate. The European Central Bank, Bank of Japan, and Reserve Bank of India are closely studying digital money as well.
By contrast, the U.S. Federal Reserve, or at least its senior officials in the Washington headquarters, have thus far been conspicuously quiet.
The current and prior Fed Chairs have been publicly tepid on the subject of Bitcoin — and there may be a broader skepticism about or reluctance to be seen as endorsing fintech at play too. But the Fed’s regional branches are engaging more straightforwardly: the other week, the St. Louis branch suggested that a cryptocurrency might “eliminate” the core tension for the the U.S. dollar: being asked to function both as a stable global reserve currency while also meeting domestic needs (known as the Triffin dilemma).
The bottom line is that flatly dismissing bitcoin and other digital assets as irrelevant or “evil” for central banking purposes is increasingly out of step with the trends and policy tools at hand, not to mention widespread appetite for a potentially faster, fairer financial system. (Why does sending a check take 4 business days to clear, again?).
The U.S. Federal Reserve should join its international counterparts and start preparing its financial infrastructure for a future where nation-backed moneys co-exist and compete alongside digital moneys settled with distributed ledgers, electricity, and math-driven consensus. As a New York Times op-ed recently noted, the U.S. dollar’s position as the world’s reserve currency gives the United States a unique opportunity to lead — or stand to lose out if other countries leapfrog ahead.
The Fed’s caution before integrating bitcoin or other advancements in financial technology is understandable. But it can best advance its mandate by publishing research and defending its decisions, not by sitting quietly on the sidelines while the world moves on ahead.
JP Schnapper-Casteras and Misha Guttentag are technology attorneys with Schnapper-Casteras PLLC.