Central Banks and Cryptocurrencies: ‘A Match Made in Heaven?’

Janet Yellen

St. Louis Fed Vice President David Andolfatto gave a bullish presentation of the cryptocurrency landscape Tuesday night, calling the technology behind Bitcoin a “stroke of genius.”

Andolfatto’s session—part of the district’s “Dialogue With the Fed” events series—provided a refreshingly smart and objective snapshot of the burgeoning movement with a dose of personal commentary on the future of decentralized currencies and payment protocols.

Some key takeaways from his presentation, titled “Bitcoin and Beyond: The Possibilities and the Pitfalls of Virtual Currencies”:

●  “[Bitcoin is] a stroke of genius—a monetary system governed by a computer algorithm” that makes “low-cost banking available to anyone in the world” and is a “digital cash supply free of political manipulation.”

 

●  “Trust is still needed—location of trust is different.”

 

●  Bitcoin might be a bubble but most asset classes like gold and US Treasuries have bubble components as well.

 

●  The failure of MtGox wasn’t Bitcoin’s fault.

 

●  Bitcoin might not be useful as a currency since unregulated, competing cryptocurrencies will likely experience “excess” volatility by design.

 

●  BTC facilitates illicit activities but so does USD and gold—”In any case, BTC also facilitates legal trading.”

 

●  On whether decentralized protocols can be regulated: “How does one slay the Hydra?”

 

●  “The effect of the [IRS guidance] and similar rulings serve to diminish the attractiveness of bitcoins as a currency. (Ripple a Winner?)”—”But enforcing an outright ban is close to impossible.”

 

●  The current movement is an extension of a long tradition: “Hundreds of local currencies exist in US alone—”New wave is an extension of this idea, combining the science of [cryptography] with the power of the Internet.”

 

●  “Probably the most important aspect of this technology revolution is the threat of entry into the money and payments system—Will force traditional institutions to adapt or die.”

 

●  “Well-run central banks should welcome the emerging competition—There is (in my view) room for beneficial coexistence; for example: Together with Ripple, a currency-agnostic P2P payment system to facilitate low-cost payments.

 

Janet and Satoshi

So not only does Andolfatto know his stuff, he’s also clearly enthused about the crypto-space. The economist’s knowledge of the technology’s monetary intimacies is further evidenced in a thought-provoking blog post he wrote earlier this year:

What we want is some way to replicate the cash experience using electronic digits instead of physical currency. Recall that in bilateral cash transactions, the accounting is done on a self-service basis without the help of the community or some other third party. When it comes to digital money transferred over the internet across a large network of users, self-serve accounting is not likely to be practical. The self-serve part will have to be replaced by some communal monitoring service (obviously not a delegated third party, since this is what we are trying to avoid).

No longer the realm of underground hackers, anarcho-capitalists, and Silicon Valley investors, the world is taking notice—and most pertinently, seeing the technology for what it truly is beyond the hype.

“Obviously this is not the official view of the Fed,” said Karen Gifford, who had a stint at the New York Fed and is chief compliance officer at Ripple Labs. “Nonetheless, 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.”

Photo: Federal Reserve