Cryptocurrencies like Bitcoin are highly volatile and not a useful store of value as they’re not backed by anything, said Jerome Powell, chair of the U.S. Federal Reserve, in the opening session of the inaugural BIS Innovation Summit 2021.
“It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar,” Powell said, at the virtual event hosted by the Bank for International Settlements this week.
Stablecoins — cryptocurrencies that are designed to minimize price volatility by pegging to a fiat currency — may have a role to play in a national economy with appropriate regulation, Powell said, “but that role will not be to form the basis of a new global monetary system.”
The Facebook-backed Diem project, previously known as Libra, drew significant regulatory interest when it was first proposed in 2019 due to concerns about its potential impact on monetary sovereignty and monetary policy given Facebook’s global scale. Libra was initially envisioned to be a stablecoin backed by a basket of fiat currencies. However, the project has since evolved to one supporting single-currency stablecoins backed by fiat currencies such as USD, EUR and GBP as well as a multi-currency coin (XDX).
“The potentially fast and wide adoption of a global stablecoin, potentially a global currency governed only by the incentives of a private company is something that will deserve and will receive the highest level of regulatory expectations,” Powell said.
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Jens Weidmann, president of the Deutsche Bundesbank concurred with Powell that stability is a precondition for central banks.
“You cannot have a useful means of payment or a store of value if the underlying asset is wildly fluctuating in value,” Weidmann said. “We [central banks] provide the stability to the system, but we can learn from those providers by looking at their technology and exploring whether this technology might make sense also in our environment,” Weidmann said.
Rise of digital currencies
With the Covid-19 pandemic accelerating the trend of cashless payments and governments increasingly concerned about the rising popularity of Bitcoin and other private cryptocurrencies, many central banks around the world are now exploring developing their own digital currencies (CBDCs). A recent survey of 65 central banks conducted by the Bank for International Settlements found that 86% were exploring CBDC issuance and about 60% were conducting a proof of concept.
“My forecast would be that we [central banks] are all seriously working on CBDC, and a lot of central banks will, of course, introduce wholesale CBDC over the time to come,” Weidmann said.
Last October, the Bahamas launched its CBDC, the Sand Dollar — the world’s first CBDC — for use by its residents. In Asia, work on CBDCs — both retail CBDCs for use by the general public as well as wholesale digital currencies for use in financial markets — has been rapidly gaining momentum in China, Hong Kong, Japan, Singapore and Thailand.
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Is there a CBDC race?
Agustín Carstens, general manager of the Bank for International Settlements, said that central banks were not approaching CBDCs as a race.
“This is a huge step forward. CBDC is something that has tremendous complexity. And there is one particular issue — it cannot fail. It cannot fail at any particular point in time,” Carstens said. “What is necessary is just to have a medium-term horizon, but make sure that it’s top quality and that there is no room for mistake,” he added.
Carsten sees central banks collaborating with the private sector in, for example, “a tiered system where the central banks provide the basic currency, but then the private sector can build on that.”
Weidmann, the Deutsche Bundesbank president, noted that there were other ways to satisfy the payment needs of consumers and firms. “We should not try to crowd out the private sector, but we should rather also enable the private sector to offer the services that the consumer needs in this environment, which is heavily reliant on online commerce, for instance.”
Weidmann added that Europe was in no rush to introduce a CBDC. He highlighted the risk of disintermediation where CBDCs could become a substitute for bank deposits as consumers shift their funds to the central banks, and increase the danger of a bank run in times of stress.
The U.S., too, is approaching CBDCs with caution.
“Because we’re the world’s current principal reserve currency, we don’t need to rush this project and we don’t need to be first to market. A dollar CBDC would have potentially large implications here and around the world, and we’ll be sure to think carefully about all of that and engage very broadly with the public around the world, in particular here in the United States before we even approach a decision,” Powell said.
“We’re sort of purveyors of stability — macroeconomic stability, price stability, financial stability,” Powell said. “We have a two-tier system: central banks interface with banks, banks interface with the public. And we do not want to destabilize that.”
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The U.S. Federal Reserve is collaborating with the Massachusetts Institute of Technology on a multi-year effort to build a hypothetical digital currency for central bank use, with a focus on developing and understanding the capabilities and limitations of the relevant technologies.
“It’s not an attempt to create a prototype,” said Powell, adding that “to move forward on this, we would need buy-in from Congress, from the administration, from broad elements of the public.”
“We haven’t really begun the job of that public engagement,” Powell said. “So you can expect us to move with great care and transparency in considering a CBDC, as is our obligation, and we’re doing that now.”