Head of the Fed Jerome Powell talks Stablecoins as Interest Rate Hikes Announced
We’ve been hearing about cryptocurrency for years. First, it was Bitcoin, the elusive and mysterious currency none of us really understood. Then, other cryptocurrencies started to make names for themselves. Our day trader friends insisted crypto was the way to go and bought in with what they could. Then major publications like The New Yorker started writing to their audience about the still obscure field of crypto, or stablecoins. Soon, unless you were under a rock, you at least got the basic concept of cryptocurrency – a form of currency that is purely digital. You can buy the currency at whatever its current market rate of exchange is, and you can then make purchases with your cryptocurrency, or you can sit on it and wait for its rate of exchange to rise, so you can sell it for a profit.
Got it? Good.
The question now is, how prevalent is this once-obscure currency going to be?
Fed Mentions Stablecoins
It is a fair question, and one a lot of people are asking. On December 15, in a press conference to discuss coming interest rate hikes (tapering), the head of the Federal Reserve, Jerome Powell, took the time to address cryptocurrency. The very fact that he bothered to comment on it, especially as it relates to other countries’ strategies around it, is a big deal.
First, Powell, assured the public that the economy is doing well. For the past decade or so, the Federal Reserve has been taking the measure of the economy based on four factors: asset valuations, or debt owned by businesses, which Powell points out is high but very rarely defaulted on, households, which Powell notes are strong, funding risk, which he tells us is low in financial institutions though money market funds are vulnerable, and leverage by financial institutions, which is currently low because capital is high. So yes, the economy looks good based on those qualifications.
When he was finished, a reporter (Michael Derby) asked about Powell’s take on cryptocurrencies and their effect on the economy in the coming year. Powell noted that the Fed’s concerns are not so much the currency’s current financial stability, indeed, he supports the president’s working group on stablecoins, but that for them to be useful and consumer-serving, they would need to be properly regulated.
He did allow, however, that if cryptocurrency were to be backed by a “very large tech network” already functioning today, that could give it a payment network that followed appropriate regulation, he could foresee stablecoins becoming part of the mainstream US economy.
As of now, Powell seems to see crypto as too risky and without backing. As he mentions, the people rely on the Fed to make sure their dollars can be trusted.
Can Crypto Be Trusted?
In a word: maybe. The truth is that if you have been in the game of day trading, economics, and market predictions and perspectives, you are probably going to be just find buying and selling cryptocurrency. The risks to the layperson, however, can be fraught with fraud and phishing.
Cryptocurrencies are secure, but because there is a lack of policy, legislation, and regulation, you could get scammed quite easily, lose everything you invest, and have no recourse. You have to be both knowledgeable and vigilant to trade in stablecoins right now.
But again, the fact that the head of the Fed took the time to comment on cryptocurrency says a lot. It says he is aware of what is happening in other countries, that other central bank digital currency systems are up and running, and that the inner workings of the US government have also started to take interest in how to incorporate this new currency into our daily lives.
In addition, the President’s stablecoin working group is discussing and researching into the prospective digital dollar, also known as a Central Bank Digital Currency (CBDC). Specific Digital Dollar research work out of the Boston Federal Reserve was underway at least as early as 2018. More recent research was also underway in 2021 to determine the prospective adverse implications and digital accessibility issues posed with the eventual digital dollar rollout.
One major issue former Boston Fed President announced earlier in 2021 is that the current state of blockchain is not fit for the Central Bank Digital Currency, due to “throughput and transaction speed.” While this is true for Bitcoin and Ethereum, he clearly has not heard of Solana and its orders of magnitude speed increases and capabilities, not to mention crypto’s environmental concerns being addressed as Solana is carbon neutral.
IRS Wades In
Especially since you will now be asked on your tax form each year if you have made money in crypto. The IRS is one government department that is less worried about regulating the money are much more interested in making sure you are paying your fair share of taxes on it. If the IRS is involved, the rest of the US government cannot be far behind.
Big Banks Deal in Crypto
And the IRS is not the only one. Kelly Evans over at CNBS reports that Morgan Stanley’s new crypto coverage launched just this morning. Wall Street is gearing up to buy, sell, and trade in cryptocurrency, as it watches some of its biggest players in the macro trading shift to crypto. Guys like Mike Novogratz and Sam Bankman-Fried, once a couple of the biggest players in hedge funds, are now cryptocurrency entrepreneurs.
It should be noted that a concern here is that with upcoming cryptocurrency regulations, big banks may be given an unfair advantage as opposed to startup ventures. Specifically, there have been signals and information coming out that there will be some sort of mandate for a bank charter. Recently the Office of the Comptroller of the Currency released a letter to national banks and federal savings associations.
It Is Time
Look, it may not be time to wade in yourself. It may still feel too unknown and risky to invest in cryptocurrency. No one wants to lose everything on an uncertain gamble. But it is definitely time to start paying attention if you have not been. Interest rates are rising at the Fed, which means money will start to become more valuable, and less available, over time, a great thing for investors, not such a great thing for the little guy. It is a good idea to start hedging your bets and start figuring out this crypto game, before it passes you and the rest of us up and heads toward a potential bust after a glorious boom.
I know I’ll be keeping my eyes open.