The topic of cryptocurrencies came up a lot on Capitol Hill Wednesday, prompting scathing comments from the head of the Federal Reserve and members of Congress in three separate hearings. Beyond the soundbites, however, other speakers pondered the potential impact of crypto on central banks, currencies and the overall financial system.
“The central bank has to decide if it wants to withdraw completely from providing a payment device for the general public or offer some kind of digital alternative,” said former Fed official Rodney Garratt.
Rep. Collin Peterson, D-Minn., echoed Powell’s sentiment in a House Agriculture Committee meeting, calling crypto a “Ponzi scheme.” And in yet another hearing held by the House Financial Services Subcommittee on Monetary Policy and Trade later the same day, one congressman went so far as to suggest U.S. citizens should be prohibited from buying or mining crypto.
“It is only a solution to the problems of tax evaders, criminals and terrorists,” said Rep. Brad Sherman, D-Calif., who repeatedly likened cryptocurrencies to burglar’s tools and a fingerprint-resistant gun. “There is nothing that can be done with cryptocurrencies that cannot be done with sovereign currency that is meritorious and helpful to society.”
At the same time, the hearings reflected Congress’ growing interest in crypto. In the financial services subcommittee, representatives and expert witnesses attempted to understand whether cryptocurrencies are money and whether some form of crypto, such as an existing coin like bitcoin () or one issued by a central bank, could ultimately threaten the primacy of the dollar as the world’s reserve currency.
“If the European Central Bank were to issue digital euros, I think the entire world would readily adopt that for digital transactions,” said Rep. Bill Foster, D-Ill. “We have to be prepared to respond to that threat.”
FedCoins or Freedom?
Experts pointed to the proliferation of electronic transfers and the worldwide decline in the use of cash as signs that central banks such as the Fed and the ECB will ultimately face a day of reckoning about their role.
“The central bank has to decide if it wants to withdraw completely from providing a payment device for the general public or offer some kind of digital alternative,” said Rodney Garratt, a professor at the University of California Santa Barbara and former vice president at the Federal Reserve Bank of New York, before the financial services subcommittee. “These are options the central bank will ultimately face and… something we should be prepared for.”
Eswar Prasad, a Cornell University professor and Brookings Institution senior fellow, stressed the implications on money creation if the Fed were to essentially allow individuals to have central bank accounts denominated in crypto. Doing so, he told the financial services subcommittee, would draw money out of commercial banks, which do the brunt of the lending that keeps money circulating and the economy humming.
Alex J. Pollock, senior fellow at the R Street Institute, cautioned that increasing the Fed’s share of the U.S. banking system’s $12 trillion in deposits would increase its “size, role and power.” To keep the economy moving, the Fed would have to issue loans, which “would unavoidably be highly politicized, and “taxpayers would be on the hook” for any losses. Central bank digital currencies, Pollock said, are “one of the worst financial ideas in recent times.”
Meanwhile, Dr. Norbert Michel of the Heritage Foundation argued before the financial services subcommittee the government should not “tilt the playing field” and should treat all forms of currency equally.
Implicit in that, Michel said, is removing capital gains taxes from purchases with any form of alternative currency, including crypto and foreign currencies. The U.S. Postal Service and other government agencies also should accept crypto and other forms of currency, he added.
“These competitive forces are the forces that push entrepreneurs to innovate…. they also expose weaknesses and inefficiencies,” Michel said. “The same competitive forces should be used to improve money.”
The Future of Money
Regardless of the pros and cons, a Fed-issued crypto doesn’t appear to be on the short-term agenda, at least based on Powell’s remarks in his semi-annual appearance before the Financial Services committee.
“We’re not looking at this as something that we should be doing,” he said.
Finance services subcommittee hearing speakers also argued that cash — and the dollar, specifically — will remain king for the foreseeable future. Despite declines elsewhere, cash remains the most frequently used form of payment in the U.S., Michel said. Others argued that the dollar’s role as a global reserve would likely continue because of the U.S. economy’s overall strength and stability.
When might cryptocurrencies challenge that role? Garratt said that would depend, in part, on whether central banks get into the digital currency game. Pollock argued that it would only happen after people stop asking, “What’s the price of bitcoin?” and start asking, “What’s the price of that in bitcoin?”