Crypto Means Business

5 Questions For St. Louis Fed Economist David Andolfatto

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David Andolfatto

Fed economist David Andolfatto explaining the blockchain. Credit: Federal Reserve Bank of St. Louis

David Andolfatto, Vice President at the St. Louis Fed, made a splash last week with his bullish presentation on the rise and future of cryptocurrencies, part of the district’s “Dialogue With the Fed” events series.

As my colleague Karen Gifford noted at the time: “It’s really exciting that there’s an economist within the Federal Reserve system who has such a good grasp and understanding of the technology and its potential.”

We caught up with Andolfatto to ask him a few questions.

Can you tell us a little bit about yourself and how you got into cryptocurrencies?

I am Canadian, from Vancouver, son of Italian immigrants, econ PhD, then taught for 20 years at Canadian universities.

I came to the Fed in 2009, following the appointment of Jim Bullard as president and Chris Waller as research director. They basically recruited me and presented me with a wonderful opportunity to apply what I learned in monetary and policy to a real world financial crisis.

I began by blogging about the fact that, despite how different gold and bitcoin are in terms of their intrinsic properties, they both shared one common feature: their supply was relatively fixed in the short-run. And it is this property that makes both objects lousy monetary instruments. I also wrote another piece.

Following that, Marcela Williams asked whether I’d be interested to deliver a public lecture on the subject. I said yes, and this made me dive even deeper into the phenomenon. Oh, I guess I also had a graduate student write a paper for me on the subject last summer.

What’s the response been like from your colleagues?

My colleagues are highly supportive of my research! We are primarily academics here in the research department, so anything goes!

Can you elaborate on how the recent IRS guidance affects bitcoin? Clarity is necessary but there’s also the issue of convenience.

Yes, clarity is good for business, so this is good. On the other hand, the IRS could have ruled in favor of designating bitcoin a currency. Because it is designated as property, every time we buy and sell bitcoins we will have to compute the USD value of the buy and sell, and record the resulting capital gain/loss.

For “regular” property sales, this is no big deal because large properties turn over at low frequency. We don’t buy and sell our house every hour or every day. But the whole premise of currency is that it circulates at high frequency—that it passes hand-to-hand easily, without much thought.

I suppose one day they’ll make an app that helps you record all this information, but my point is simply that the ruling serves to diminish bitcoin as a *currency* (though, not necessarily as a store of value).

How exactly do you see the Fed co-existing with these technologies?

The Fed manages the supply of the greatest currency on the planet, King Dollar. I know that many people have criticized the Fed for many things and, indeed, no institution is perfect. But over the last 30 years, the US inflation rate has been low (still positive) and stable. As long as the Fed continues to manage its currency in a responsible manner, it will remain dominant.

Thus, I do not see any crypocurrency displacing the USD any time soon (though the fact that the threat exists is a good thing, in my view – it will help discipline central bank behavior, should a central bank stray too far from its price-stability mandate).

I do see a number of these currencies existing side-by-side with the USD, much in the same way we see hundreds of local currencies in circulation today. So if the USD remains king, the main point of entry for this virtual currency revolution would seem to me to be what it can offer in the way of processing payments, especially at the retail level.

This is why I am relatively bullish on the Ripple protocol. So, in short, we have the Fed doing what it does, we have the banks doing what they do (financing investments), we have Ripple-like services taking over a big part of the payments business from banks, and we have Bitcoin-like cryptocurrencies financing a relatively small fraction of transactions. Something like that, though I will have to think about it much more carefully.

How do you see this technology shaping the future of our global economy?

As history shows over and over, when transaction costs fall, trade expands. This was true with the development of canals, railways, etc. I expect the new wave of technologies to promote trade in the same way.

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