By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
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
The US District Court has ruled that cryptos are “commodities.”
That seems about right.
Cryptos may actually be Giffen goods. Hard to think of a more inferior product.
Yes, they appear to be a speculative commodity. Think of them as toxic Beanie Babies which are very, very expensive to make at this point, and you’re near their parameter-space.
The entire mania surrounding crypto-coins has been quite a fascinating process. But a commodity which can go between 1 and 100 in value in a matter of weeks? A great, great medium to take real moneycandy from actual adult babies.
Lots of people I know have been on the crypto thing for some time, and many of them increasingly adopt a libertarian framing, I think often unknowingly. Fiat currency this or that. I don’t see the logic of us expanding or contracting the supply of a currency, given our vast domestic problems and the environmental crisis, based upon something like gold or silver underlying the currency.
Any rate, the crypto stuff to me seems to just be a further extension of financialization. If things worked as my friends wanted them to, we would have something like the free banking era, where there were essentially at one point about 10,000 currencies in existence. Even if the number was much less, how would that work in regards as a medium of exchange? If we had a multiple crypto world and the US government accepted crypto currencies for paying taxes, it wouldn’t make sense to have one crypto currency. You could wake up and find out that the currency you had collapsed in value while you were sleeping. You could go to having a lot to nothing quickly. So, you would have to but a number of them, to guard against stuff like that. How in the hell would a working person in the US operate in a world like that? You have ten currencies, and you want to buy bread, and have to do day to day calculations in regards to buying basic items? If four currencies go down, but three go up, and three roughly the same, do you have an app to calculate how much money you have, and how would you know unless there was an objective measure of value to compare those currencies to each other, and those currencies to the things you want to buy? I understand crypto in regards to a store of value, but I don’t think it makes an ounce of sense in any other way. To think that the world would move to this seems to be a dystopian nightmare.
Not to throw too much out there, but I fail to see how capitalism as is can deal with the environmental crisis. Most impacts don’t have market values, there are limits to growth in throughput and the generation of pollutants, and the market economy is chaotic. How exactly does it reach a particular endpoint, say a given level of pollution, without some type of central coordination? How do you rely heavily on the market when the market is missing so much information? How can the capitalist system possible work in a no growth environment, and how does the system work when there are physical limits with some parts of the economy, while there are not physical limits with the financial and monetary sector? Then, throw in the utopian vision that the crypto types have. Adding to this complexity, we will have a free banking era version 2.0. We have collectively lost our damn minds.
July 25, 2018 at 1:36 pm
“We have collectively lost our damn minds.”
I find Mark Blyth’s stance on Cryptocurrencies, “if you have to explain why it’s a currency, it’s not a currency”, to be the most succinct way of pointing out what a sham the whole concept currently is.
Apologies for being the Neo-Chartalist in the room, JP …
But w.r.t. “If you think about what currencies do: they’re supposed to be a means of payment and a store of value basically”, you forgot (that which for Chartalists) is the most important function of money: unit of account.
To be fair, your statement is not surprising at all. The emphasis on the medium-of-exchange and store-of-value properties of money feed into the incorrect (and predominantly accepted) version of money’s history where it evolved from barter, as opposed to that of a state (tax) imposed unit of account. Subsequently, it shouldn’t surprise JP or anyone else that the ability to quickly inflate the store-of-value wins out despite cryptocurrencies’ limited utility as a medium exchange.
As always, caveat emptor.