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Fed’s Powell on CBDC: Bitcoin substitute for gold not dollar

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Talking today on a heavyweight central bank panel, Jerome Powell, Chair of the U.S. Federal Reserve, insisted that the Fed’s current exploration of central bank digital currencies (CBDCs) was not motivated by cryptocurrencies and stablecoins.

“Crypto-assets are highly volatile (see Bitcoin) and therefore not really useful as a store of value and they’re not backed by anything. They’re more of an asset for speculation. So they’re also not particularly in use as a means of payment,” said Powell. 

“It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar. And I think with crypto-assets, the public needs to understand the risks. The principal thing is there’s the volatility. There’s also the outsized energy requirement for mining, and the fact that they’re not backed by anything.”

Powell’s comments about Bitcoin were in response to a question from the Financial Times’s Gillian Tett during a BIS event. She asked whether CBDCs are a reaction to the financial stability implications of innovations such as Bitcoin.  

Agustín Carstens, the Bank for International Settlements’ (BIS) General Manager, concurred that cryptocurrencies raise financial stability risks and it is a consideration. He also noted the arbitrage between a regulated two-tier system with central banks at the core and one where “no AML/CFT considerations are anticipated”.

Switching direction to stablecoins, Carstens stated that stablecoins “import value” from sovereign currencies. “So how could that be superior to the original asset that is providing value?” he asked. “There by itself is a weakness.” In the past, other ideas similar to stablecoins have failed because the backing proved problematic at critical moments.

“Central banks are there to provide stability,” said Carstens. “Therefore central banks cannot support ideas that inherently have elements of instability there.” Balancing his comments, he said that some very “nice technology” has been developed and there are ideas in stablecoins that “should be rescued” through public-private partnerships.

Meanwhile, Powell said stablecoins are an improvement on cryptocurrencies, highlighting their credibility is based on sovereign money. 

“Stablecoins 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. “Private stablecoins are not going to be an appropriate substitute for a sound monetary system based in central bank money.”