Go find someone else to regulate them.
Fed Chairman Jerome Powell, during his testimony before the House of Representatives Committee on Financial Services, was asked by representatives Patrick McHenry (R, North Carolina) and Juan Carlos Vargas (D, California) about the Fed’s thinking on cryptocurrencies. Instead of pussyfooting around the issues, as Fed chairs used to do, he refreshingly stepped right into it, with both boots on the ground, so to speak.
McHenry, “Could you outline your thinking on cryptocurrencies?” Powell:
1. No serious financial stability threat yet: “I think the question I was asked that you’re referring to was, ‘Do cryptocurrencies currently (strong emphasis) represent a serious financial stability threat.’ And my answer was, ‘They’re not big enough to do that yet (strong emphasis).’ That’s really what I was saying – not that they’re not a longer-term thing.
2. They’re great for hiding or laundering money: “They’re very challenging because cryptocurrencies are great if you’re trying to hide money, or if you’re trying to launder money. So we have to be very conscious of that.”
3. Investor and consumer protection issues: “There are also significant investor risks: Relatively unsophisticated investors see the assets going up in price (head and eyes do a quick tilt toward the ceiling), and they think, ‘This is great, I buy this.’ In fact, there is no promise behind that. It’s not really a currency. It’s… it’s… It doesn’t really have any intrinsic value. So I think there are investor and consumer protection issues as well.”
4. No Fed-coin: “We’re not looking at this at the Fed, that the Fed would do a digital currency. That’s not something we’re looking at.”
5. Cryptocurrencies are not functional currencies: “If you think about what currencies do: they’re supposed to be a means of payment and a store of value basically. Cryptocurrencies are not really used very much in payment (for legal transactions). Typically, people sell their cryptocurrencies and then pay in dollars. In terms of a store of value… look at the volatility. It’s just not there.”
McHenry: Have there been discussions with other G-7 central banks about cryptocurrencies? Powell:
6. It’s a big risk the public needs to be informed about: “It comes up a lot, yeah. I’m only just starting to go to G-7 meetings, but it comes up quite a bit in international forums of various kinds. There is a broad concern that the public needs to be well-informed about this. The money-laundering and the terrorist financing and all of that is a big risk.”
7. But we don’t have jurisdiction: “The BIS (Bank for International Settlements) report and others have called out these risks and have called on the appropriate regulatory bodies to address them. We don’t have jurisdiction over cryptocurrency. We have jurisdiction over banks, and so we know their activities with cryptocurrency companies and cryptocurrency, we can address that. The SEC can address the investor protections aspect of it.”
8. Is lack of jurisdiction an impediment to monetary policy? “Not at all today.”
McHenry: Though there are money service license requirements in 52 states and regulations by CFTC and SEC, there is no “concerted effort by the federal government to understand what’s happening in crypto. Do you have any staff resources devoted to crypto?”
9. Go find the place that has authority: “We’ve looked at it carefully. I spoke about it. Other governors have spoken about it. Reserve bank presidents have spoken about it. There’s plenty of work going on, but again we don’t have this regulatory authority to deal with it, so that’s the key thing, is to be looking at the places where there is that regulatory authority.”
10. I’m not going to say ‘yes’ today:
Vargas: Should you have jurisdiction of cryptocurrency?
Powel: “That’s a deep question (struggling). We’re not seeking it.”
Vargas: “But should you?”
Powell: “I’m not going to say ‘yes’ today. We’re not looking to… you know, it’s right in the middle of the SEC’s turf, the investor protection aspects of it, I think Treasury and Fincen (Financial Crimes Enforcement Network) and other people have… I think it should be well-regulated, but I don’t see us as the right group to do that.”
Well, things are getting pretty tight for Tesla, it seems, and the year is only half-over. Read… “Desperate” Tesla Asks Suppliers for Cash Back Retroactively to 2016
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
“… what currencies do: they’re supposed to be a means of payment and a store of value basically.”
Would someone please tell the Fed Chief that [fiat] currencies are not a store of value, nor were they ever intended to be?
You beat me to it. Store of value, not a priority. Real estate has become the store of value thanks to this esteemed institution. Those who missed out on real estate, can only afford cryptos. All herded in that direction by the central bankers. Are these hearings just for theatre?
Real estate has been a great store of value in some places (e.g. Toronto) but not in others (e.g. Detroit, a mere 240 miles away). In the late 1960’s, slum landlords were abandoning their properties in parts of Brooklyn owing to rent control. In many property taxing districts around New York City, high tax rates have been depressing property values for decades. In some parts of New York State, annual property tax rates of 5% of the value of the property are not unusual.
Wars tend to cause paper currencies to lose value. WWI, WWII (Europe and Japan) and the Viet Nam war (US) were especially destructive of currency values. Governments find it easier to print money than to raise taxes to pay for wars honestly. Although Canada was not a participant in the Viet Nam or Iraq wars and only a small player in Afghanistan, its currency has, overall, under performed the US $ since the 1960s.
Regarding “store of value”, I would humbly observe both of you have you heads firmly in the sand.
Of course a fiat currency is not a perfect instrument for this (if fact, no asset is), but it’s better than cryptos (up over 1000% last year, down over 60% this year) or Miami Beach condos (remember 2008?).
Sure, some people make money on this stuff, but it’s also true 5 out of 6 Russian roulette player live to play again…
*Rimshot* ;)
Were when interest rates were above zero. In Real negative rates for years Fiat currencies are not store of value. Agree no Real estTes but IT is roo late to buy them
On the tenth try you’re 1 out 6. Ouch!
A store of value, an investment, and a speculation are all different things.
A store of value is by definition something that maintains its value, its original purchasing power, over time if kept in its original form, with no yield from investment. Putting currency in the mattress at some time, and taking it out at some future time should have the same purchasing power if it were a store of value. It doesn’t.
An investment gives a predictable return, hopefully above the loss of purchasing power.
A speculation returns profit, or doesn’t, or gives losses.
Clearly, “store of value” is a problematic term. As long as wage-earners accept fiat currency (here including electronic representations of such, e.g., auto-deposit of wages to bank account) in payment for work they have done, and use that currency to pay for lodging and food; and as long as the government requires payment of taxes in that fiat currency, : the fiat currency represents some value.
At a time when interest rates roughly keep up with inflation (as felt by wage-earners), fiat currency may act as a store of value.
With zero interest rates, VERY low int. rates, and most especially, negative interest rates, dictated and enforced by Central Banks, those same CBs have driven home to the wage earner, that fiat currency represents the loss of value in their savings; as remarked above, that savings must go to investments in the stock market, real estate, etc., or for some, just spending, because of the hopelessness of saving.
When we hear on CNBC that Jeff Bezos is world’s richest man, and has been buying “land”, while many commenters to WS tell of their inability to find an affordable home, it’s a reminder that a fiat currency has no innate value, and its political mismanagement is destructive to a nation’s prosperity.
Perhaps a new definition of “fiat currency” is in order. robt’s definitions are not bad, although def. of “investment” seems overly optimistic. Anyone ? “Fiat currency” ? (Sarc. wanted, please !)
If you are playing RR and you fire the gun six times there is no bell curve.
The obvious difference of Russian roulette though, is the odds are even for every player. In the case of most any asset class, the big boys have the clear advantage.
The value fiat stores for me is that I can settle my tax bill with it and every single place I want to use it at accepts it without issue.
Crypto’s are investments, not “money”, IMHO….AND always seem to be quoted in value by being compared to how much they are “worth” in dollars…….imaging being the person that bought into this when Bitcoin was at $15,000 (see how I expressed it’s “value”) and then at $19,000 thinking i’m making a killing……but then something happened.
Cryptos are “possibly” investments.
If cryptos are not money, yet, they are currency in that they have no intrinsic value.
Gold’s “worth” is valued in dollars too, an error imo.
But this is all semantics, and doesn’t matter. What does matter is how/when the Fed/BIS et. al. will transition to unbacked fiat-crypto. I think Powell was being disingenuous.
(And fwiw, my “investment” in all this is blockchain technology, not cryptocurrencies.)
@SP
Blockchain, what is it good for?
Kai Stinchcombe, co-founder and CEO of True Link Financial, joins Jim Grant and team to discuss his recent article questioning the utility of the supposedly-groundbreaking software for digital asset.
https://www.youtube.com/watch?v=BnOAWa4JQ_A
Do you have a good counter to Kai’s comments here?
I am in agreement with all your comments above regards crypto and gold.
sorry, I should have included this summary of Kai says:
“Everyone says the blockchain, the technology underpinning cryptocurrencies such as bitcoin, is going to change EVERYTHING. And yet, after years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain—besides currency speculation and illegal transactions.
Each purported use case — from payments to legal documents, from escrow to voting systems—amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?”
https://hackernoon.com/ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain-ee98c180100
A ‘possible investment’ is a speculation.
Cryptos are a derivative of money, i.e. currency, currency being a legitimate/legal means of settlement. Because there is no predictable rate of return cryptos are a speculation. You can settle transactions for goods in cryptos, like barter, and keep them, or as most businesses do, convert most or all of the crypto to widely useful currency.
…
Gold’s ‘worth’ is translated in dollars (or Euros, or Yen, etc), so not an ‘error’, but expressions of value in relative terms as derivatives of gold. All the currencies can fluctuate relative to each other, and each is expressed as relative to the value of the dollar. Because the dollar is the most widely accepted currency, gold is priced in dollars, as a benchmark. Perhaps in the future, some other currency accepted world-wide will be the derivative of gold. But the settlement of last resort is gold.
My computer genius/sarc nephew (self proclaimed) is now ‘into’ crypto. He is always behind the power curve on everything digital, and always has been. Therefore, look for decline and setback.
How do you spell “bottom feeding shyster”. Oh…N-e-p-h-e-w.
I’m sticking to this prediction. :-)
Wow! I bet Thanksgiving around the dinner table is fun at your house…
I would think Crypto’s would be just what the CIA has always dreamed of. A way to launder money that’s difficult to trace.
Nope, I don’t think they’re going away…………..
Block Chain is like a surveillance video. Once unmasked it is the undeniable proof that convicts a money launderer. The idea that government agencies can’t trace is laughable. Most likely this is a DARPA project similar to the world-wide-web.
A guy has offered to sell me the Brooklyn Bridge for $1,000,000. It’s a great investment although I don’t understand why he insists that I pay in bitcoins.
Not sure why but I keep hearing Bob Dylan’s “Ballad of a Thin Man” running through my head.
I suggest you seek medical help if this continues.
@ Mr Jones
ironically, that is probably because you do know what is happening.
Criptos may not be federally regulated by a central U.S. agency, , but officious disincentives to aquire them are coming into play.
The major U.S. exchanges are now requiring onerous ID procedures for new traders. Coinbase, for example, requires the supplicant to take a digital picture of himself holding his drivers license, using a CPU digicam with a direct transmission of the image digitally directly to them, or submit his ID through an Android smartphone.
Perfect for automatic acquisition by “Home Security” databases.
These requirements are far in excess of those required for reliable ID verification. Financial enterprises of all sorts use secure emails within their sites to accept JPG scans of a license
Here is Coinbase’s rationalization:
“Coinbase is required to comply with many financial services and consumer protection laws, including:
“The Bank Secrecy Act, which requires Coinbase to verify customer identities, maintain records of currency transactions for up to 5 years, and report certain transactions.
“The USA Patriot Act, which requires Coinbase to designate a compliance officer to ensure compliance with all applicable laws, create procedures and controls to ensure compliance, conduct training, and periodically review the compliance program.
“Most states’ money transmission laws and corresponding regulations.”
https://support.coinbase.com/customer/en/portal/articles/2689172-is-coinbase-regulated-
The absolute truth is that there is only two physical things that have true value and that is food and water. We are already losing twice the farmland than what we can create and vast fresh water reserves are disappearing. The time will be here when there will be no food or fresh water and all the precious metals, stones, paper and crypto won’t save our behinds.
koolaid and hallucinogens. just sayin.
on the other hand, my theory of money as a fractional approximation of the whole is quaint, archaic and simplistic.
by the way, got 5 checks yesterday, need to go deposit the fiat in the bank and send some fiat to my creditors too.
fractional in, fractional out.
@ragnarD
“Each purported use case — from payments to legal documents, from escrow to voting systems—amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed.”
I’m very far from an expert but what attracts me is precisely the fact that centralized systems are controlled by parties that I have no real reason to trust. Thus, widely-distributed, encrypted, transparent , anonymous, multi-nodes etc. appeals to my sense of security. No single party controls the transaction. Why give such power to an individual or company when you don’t have to? So perhaps there’s a political/philosophical reason to use distributed ledgers instead of centralized ones. As far as using a blockchain for national currencies, I’d prefer that to a central bank model as well, but the devil would definitely be in the details on that one.
So you say “I’m very far from an expert but what attracts me is precisely the fact that centralized systems are controlled by parties that I have no real reason to trust”, but apparently you trust the anonymous dudes who periodically steal half a billion dollars (fiat currency) worth of whatever-coins.
I said above that I’m not into cryptocurrencies. ( And what kind of a moron keeps them on an exchange anyway?)
The topic was blockchain.
Thanks for playing.
Sorry Pete. I took your comment “Thus, widely-distributed, encrypted, transparent , anonymous, multi-nodes etc. appeals to my sense of security.” at face value.
@SP
I’m in agreement with you on the benefits of an “ideal” decentralized money / transaction system. But I’m also in agreement with Kai Stinchcombe that we apparently aren’t there yet, as no one wants to use this stuff, YET. At least.
Seriously, under the current system you can get out of almost any fool hardy transaction you do on Ebay / PayPal /MasterCard /Visa. Even return stuff for upto a year at many stores, etc.
Are the minimal fees we pay for such credit/transaction services too much relative to the service we would get from anonymous, unreversable crypto transactions?
Thought experiment: would you want to travel the world with MC/Visa/Amex in your wallet or crypto currency in a “secure” crypto wallet?
So what if the banks get involved in crypto currencies? Accepting payment for instance? Will the Fed be interested then?
The FED represents the interests of the banking cartel, so whatever they want, the FED concocts a path to get it done.
Banks are not into barter. You cannot make a mortgage payment in cows. You have to sell the cows and then, with the proceeds, make the payment in dollars. Same with any of the 1,660 cryptocurrencies and tokens that are now floating around out there.
Cryptos are less tangible than fiat currencies, shares of stock, bonds. etc. While you can grab currency or your latest statement from your broker, they are just paper and subject to the whims and confidences of others.
In these times I like things that I can touch, see, or dig into like metal, objects of beauty, or land,..though they are also subject to value due to demand. Solid assets vs ephemeral regardless of their duration appeals to me at this point(age 69).
Prediction: World trade, imports and exports, will eventually become crypto based. No alternative!
“Blockchain” sounds pretty smokin’ cool though, way better than “chain pulley” or “ball and chain”.
If blockchains re so cool, why is it that sneaky dudes slip in, steal half a billion (fiat currency value) worth, and just vanish into the mists?
It’d be interesting to see somebody actually use a blockchain to track down & recover some of the hundreds of millions (again, fiat currency) of stolen coins.
Blockchain, like perpetual motion machines, is bupkis. It works hypothetically, but not really. Go ahead – somebody track down the bad guys and recover the stolen goodies.
If you were a resident of Venezuela you would have been better off spending your currency on bitcoins. Money laundering, hiding money from governments, it does have a function.
Reminds of the proverb, “A fool and his money are soon parted”. I keep hearing about our fiat currency, will crash at any moment, so buy precious metals/crypto. A friend of mine has been reciting this doomsday scenario for years, scooping up gold and silver like sand at the beach. Hordes it in his safe, no interest, no dividend and very little appreciation so his only hope is that we crash and burn and his rags to riches fantasy will materialize. Interesting to me however, are those selling precious metals based on fear, even accept this soon-to-be worthless “fiat currency” we call the dollar in exchange for metals. Meanwhile, I bought real estate with fiat currency years ago and receive dividends monthly in the form of rents while my appreciation has grown exponentially. As long as our fiat money can be used to buy hard assets, load up on it.