Randal K. Quarles, a Trump administration appointee to the Federal Reserve Board of Governors and Vice Chair for bank supervision, has given a lengthy speech (“Thoughts on Prudent Innovation in the Payment System”) that directly targets Bitcoin as a danger to the monetary and financial system.
To reiterate, an official speaking for the nation’s central bank that manages the global reserve currency – the institution that has long bragged about its power to bail out the entire world with the magic powers of the alchemist – has put down Bitcoin for being untrustworthy, unbacked, and unsound.
The timing here seems about right. Nine years ago, Bitcoin was born, but only a small group of developers were really paying attention. Today, there are lines forming at Bitcoin ATMs around the country as people scramble to convert cash to digital money even at absurdly high premiums.
With one unit of Bitcoin now worth 10,000 times the US dollar, it makes sense that the Fed would begin to feel a bit defensive. Indeed, the speech comes to the defense of the central bank, the existing money, and payment system networks, and calls for the pace of innovation to be controlled by regulators in the interest of “prudence.”
His summary criticism of Bitcoin is that:
That a Fed official would denounce cryptocurrency as unbacked strikes me as the height of irony. The dollar was once “backed” by the secure asset of gold, but that system was finally abolished by Richard Nixon’s Fed in 1971, lighting up inflationary fires that lasted a full decade. Since then, the banking system has moved from crisis to crisis, from the S&L debacle of the late 1980s to the near-death experience of the entire financial system of 2008.
This is not an excellent track record.
It is not a coincidence that Satoshi Nakamoto released his White Paper on Bitcoin in October 2008. It became very clear that we needed a new system of sound money that could not be manipulated by the very regulators and central banks that unleashed the crisis. Bitcoin was proposed as a sound money solution.
As for backing, Bitcoin is backed by the use value of the distributed ledger in the underlying technology of the Blockchain. What’s more, that backing has been tested. The march of BTC value from $0 to $10,000 in nine years reflects a market judgment, not anyone’s imposition, dictate, or regulatory plan.
Stability and Instability
And yet Quarles raises questions about Bitcoin’s soundness and suitability to serve as a kind of mainstream infrastructure for money, banking, and credit. Because cryptocurrency is privately produced and managed, he compares it to the banking system that existed before the Fed.
But, again, the entire story of cryptocurrency is that it was a response to a loss of faith in the system that the regulators have overseen. The banking system did not perform well at all in this time of stress and needed trillions of dollars in fiat subsidies to maintain confidence.
Quarles also seems confused about the structure of Bitcoin itself. It deals in settled payments, not faith and credit. The entire point was to create a system that does not rely on trust; it runs on proof. The same cannot be said about the banking system before the Fed, which lived on leverage, risk, and dealing in government debt.
It is, however, true that the existing Bitcoin network today cannot scale to become a mainstream payment system, and there is strong evidence that it was never intended to. But this is also why there is continued innovation in the sector, with new payment methods, alternative tokens, side networks, and other scaling solutions. The beauty there is that cryptocurrency doesn’t have to wait for a crisis to be tested; it is stress-tested in real time all over the world every second of the day.
Many people have wondered if the Fed and other central banks would seek to compete with private-sector cryptos. Quarles strongly rejects that idea:
As a practical matter, I believe that consideration of a central-bank-issued digital currency to the general public would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy to name a few. I am particularly concerned that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing.
Instead, he says, we should look to the existing banking system to continue to improve, citing here such “innovations” as banks with websites and mobile applications.
But this begs the question: If the existing analog system, made available only to people the government knows and tracks, is so trusted, why is the competition doing so well? And why is he so against it if consumers seem so ready to embrace it with such vigor?
Still, he assures us that if we just give the Fed a chance (ok, it’s been 100 years now), it will get better. It really will.
This “potential improvement in settlement services” has a name: blockchain. I say to the Fed: you didn’t create that.
The entire rationale behind the Fed relies fundamentally on monopoly. End that and you end it entirely. This is what Quarles knows. And so do crypto holders, who together now control $350 billion of wealth. It’s just the beginning.
This article originally appeared on FEE.